UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
_________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 0-27190
PARAMOUNT FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 11-3072768
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
ONE JERICHO PLAZA
JERICHO, NEW YORK 11753
(Address of Principal
Executive Offices)
(516) 938-3400
(Registrant's Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Units, each consisting of two shares of
Common Stock and two Class A Warrants
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(Title of class)
Class A Warrants, each to purchase one share of Common Stock
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(Title of class)
Common Stock, $0.04 par value per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock (Common
Stock) held by non-affiliates of the Registrant on March 18, 1999
was approximately $1,618,017 based on the closing sales price of
such stock on such date, as reported by the Nasdaq SmallCap
Market.
The number of shares outstanding of the Registrant's Common
Stock, as of March 18, 1999 was: 2,160,000 shares of Common
Stock, $0.04 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement relating to the
Registrant's 1999 Annual Meeting of Stockholders, to be filed by
the Registrant with the Securities and Exchange Commission on or
before April 30, 1999, is hereby incorporated by reference into
Part III of this Annual Report on Form 10-K.
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PARAMOUNT FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1 - BUSINESS . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . 1
System Integration and Consulting Business . . 2
Staffing Services Business . . . . . . . . . . 4
Lease Finance Business . . . . . . . . . . . . 6
Employees . . . . . . . . . . . . . . . . . . 10
Government Regulation . . . . . . . . . . . . 10
ITEM 2 - PROPERTIES . . . . . . . . . . . . . . . . . . 11
ITEM 3 - LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 11
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . 11
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . 12
ITEM 6 - SELECTED FINANCIAL DATA . . . . . . . . . . . . 14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General . . . . . . . . . . . . . . . . . . . 16
Fluctuations in Quarterly Results . . . . . . 17
Lease Accounting . . . . . . . . . . . . . . . 18
Results of Operations . . . . . . . . . . . . 18
Liquidity and Capital Resources . . . . . . . 21
Impact of Year 2000 Issue . . . . . . . . . . 23
Forward Looking Statements and Associated
Risk . . . . . . . . . . . . . . . . . . . . . 24
Inflation . . . . . . . . . . . . . . . . . . 25
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . 25
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . 25
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . 25
PART III
ITEM 10 - ITEM 13 DOCUMENTS INCORPORATED BY REFERENCE . 26
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 28
-i-
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PART I
ITEM 1 - BUSINESS
GENERAL
Paramount Financial Corporation and subsidiaries
("Paramount" or the "Company") is a comprehensive business
solution provider, offering customers a wide range of integrated
services, including lease finance, information technology ("IT")
consulting, network design and implementation, and staffing
services. The Company was formed in 1991 and includes two wholly
owned subsidiaries, Paratech Resources, Inc. ("Paratech") and
Deltaforce Personnel Services, Inc. ("Deltaforce").
The evolution of Paramount from a high technology equipment
leasing and trading company to a full service business solution
provider began in 1996. During the first quarter of that year,
in response to the Company's need to provide its customers with
more value added services, the Company created a new wholly owned
subsidiary, Paratech Resources, Inc. Paratech offers customers a
full IT service solution, including hardware, software, system
design, integration and other value-added support services for
the local area and wide area network (LAN and WAN) environment.
In an effort to further enhance and expand its network
integration services and solutions business, Paratech acquired
Comptech Resources, Inc. ("Comptech") in October 1998. Comptech
is a systems consulting, software application, Year 2000
compliance and Internet commerce development firm. The
acquisition of Comptech brings to Paramount a specialization in
client-server accounting, sales-force automation, web development
and e-commerce applications, which when combined with Paratech's
systems integration and consulting services, enables the Company
to offer a full complement of state-of-the-art technology
solutions.
The Company's strategic diversification and expansion plans
also resulted in two other acquisitions during 1998. In January
1998, the Company completed the acquisition of Deltaforce
Personnel Services, Inc., a privately held New York City based
staffing company specializing in legal support staff. This
acquisition further enhanced the Company's product offerings by
including staffing services to its expanding list of integrated
services. The Deltaforce acquisition was followed in August by
the acquisition of RBW Staffing Services, Inc. (d/b/a WordSmiths)
("WordSmiths"), a New York City based staffing company also
specializing in legal support staff. Following this second
acquisition, the Company merged the operations of WordSmiths into
Deltaforce to form "The DeltaGroup." As a result of the
Deltaforce and WordSmiths acquisitions, the Company now offers
not only temporary legal support staff, but also temporary and
permanent IT, attorney and paralegal placements.
Throughout this period of strategic expansion and
diversification, the Company maintained its lease portfolio and
in 1998 selectively engaged in new lease transactions. The
Company believes that in acting as an integrated lessor and
business solution provider, it is well positioned to meet the
ever-changing needs of its customers.
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During the three years ended December 31, 1998, the Company
has generated over $100 million of new lease business. Due to
the large dollar size of the Company's leasing transactions, the
majority of the Company's revenues for fiscal 1998 and 1997
continue to be from leasing and lease related transactions.
SYSTEM INTEGRATION AND CONSULTING BUSINESS
Industry Background
Technology is more important in business than ever before,
since almost every aspect of an organization is dependent on
computer and information technology. As a result, IT
infrastructure has become a vital element of an organization's
long-term business strategy. However, in today's competitive
business environment, the Company believes that most
organizations are focused on their core competencies and not on
managing and maximizing the return on their investment in
technology. Thus, the Company believes that the need is
increasing for the expertise of companies such as Paratech to
help businesses through this process.
The Gartner Group, a leading computer industry analyst,
estimates that the average cost of a corporate customer
acquiring, maintaining, supporting and disposing of a networked
PC is approximately $41,000 over a five year period. Thus, more
than ever, companies are struggling for cost-effective solutions
that bring order to this ever-changing situation, and the Company
believes that many businesses will continue to recognize that
they cannot achieve this on their own. The Company believes that
businesses are looking for solution providers that can offer them
a full spectrum of services that will ultimately lead to a lower
cost of ownership of their IT assets.
Systems integration includes designing systems and
integrating hardware, software and communications. According to
the International Data Corporation, a computer industry research
firm, the systems integration market will grow to nearly $27
billion by the year 2000. This growth is being driven by several
factors, including the proliferation of distributed computing
applications, the increased reliance on network computing, and
the trend for companies to outsource network management
responsibilities to companies such as Paratech.
The U.S. Department of Commerce reported that 100 million
people logged onto the Internet in 1997, up from 40 million in
1996. The Internet is dramatically changing the way companies do
business making electronic commerce an essential tool for any
business. Companies that implement Internet commerce sites
require professionally designed web sites, reengineered business
processes, integration with their back-office, and scalable
transaction systems. These companies generally lack the skills,
systems and expertise to effectively launch and manage the
increasingly sophisticated network systems and support
infrastructure required to conduct electronic commerce. More
than ever these companies are reaching out to industry experts
such as Paratech.
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Operations
The Company's system integration and consulting business is
conducted through Paratech Resources Inc.
Paratech's mission is to assist and support companies in
designing computer networks that cater to their individual needs
and to implement these systems in a cost-effective manner.
Paratech ensures that these systems support a company's business
goals by staying closely attuned to each client's environment in
order to provide the strategy and consulting required to achieve
their goals. Paratech offers a full range of comprehensive
technology solutions, including network design and integration,
software applications, system training and value-added support.
Nineteen ninety-eight was a year of great expansion for
Paratech. Paratech significantly broadened its sales and
technical staff and the range of its product offering with the
acquisition of Comptech. Comptech brings to Paratech a
specialization in Great Plains client-server accounting software,
Goldmine sales-force automation software, web development and e-
commerce applications, which when combined with Paratech's pre-
existing systems integration and consulting services, enables the
Company to offer a full complement of state-of-the-art technology
solutions.
Paratech is platform independent and thus can provide
customers with the latest technology and flexible financial
alternatives. Because companies want both value and fast
delivery of their products, Paratech sifts through the barrage of
products and equipment to offer the most extensive and complete
solutions to its customers. Paratech works with its customers to
develop strategies governing when to acquire equipment, upgrade
existing equipment and order new equipment to take advantage of
current technology. The Company believes that a single source
solution enables the customers to use fewer vendors while
providing a more efficient integration, thereby reducing costs,
minimizing risk, and increasing management control and
accountability.
Furthermore, through Paramount, the Company can offer its
customers lease financing for all of the products and services
that it sells through Paratech. The Company believes that this
"vertical integration" provides Paratech with a significant
competitive advantage in the system integration market.
Customers of Paratech are provided with a total technology and
financial solution which will allow them to assess their IT costs
in terms of a fixed monthly rate, rather than a large one-time
cash outlay.
Competition
Paratech competes against major hardware distributors and
national and regional consulting and service organizations. The
Company believes that it is able to compete in this market due to
the technical expertise of its employees, its focus on customer
service, and its relationship with equipment manufacturers and
vendors. In addition, the Company believes its ability to act as
a sole source provider offering all components of an IT solution,
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from hardware and infrastructure to specific application software
and Internet design and implementation, provides it with a
competitive advantage.
Customer Concentration
Paratech's typical customers are mid-size regional
organizations with ongoing IT infrastructure needs. The Company
believes that Paratech's business is not dependent on any single
customer. For the year ending December 31, 1998, the three
largest customers of Paratech accounted for 21.0% of total sales.
The loss of any of these major customers could have a material
adverse effect on the Company's business, financial condition and
results of operations.
STAFFING SERVICES BUSINESS
Industry Background
The temporary staffing industry, once used predominately as
a short-term solution for peak production periods and to
temporarily replace absent workers, has evolved into a permanent
and significant component of the staffing plans of many
companies. Corporate restructuring, downsizing, increased
government regulations governing employee relations, advances in
technology, and the desire by many companies to shift employee
cost from a fixed to a variable expense have contributed to the
strong growth of the temporary staffing industry. Temporary
staffing firms act as intermediaries in matching available
temporary workers to employer assignments. According to the
Staffing Industry Report, an industry research firm, the
temporary staffing industry was a $54.5 billion industry in 1997,
and was estimated to reach $62.9 billion in 1998. Of this total,
office/clerical and IT, the two segments in which the Company
operates, accounted for $29.0 billion in 1997 and are estimated
to reach $35.6 billion in 1998.
Operations
The Company entered the temporary staffing business in 1998
with the acquisition of Deltaforce Personnel Services Inc.
Deltaforce, which commenced operations in 1988, is a
provider of temporary legal-support staff to the legal community
in the New York City metropolitan area. Deltaforce's typical
clients are large New York City based law firms with on-going
needs for temporary personnel services. The Company's
acquisition of Deltaforce was followed closely by the acquisition
of WordSmiths in August. WordSmiths is an 11-year old staffing
firm providing law firms with support staff, proofreaders, legal
professionals and paralegals, and its services are a strong
complement to the legal services of Deltaforce. Following this
second acquisition, the Company merged the operations of
WordSmiths into Deltaforce to create The DeltaGroup. The
combined company now offers not only temporary legal support
staff, but also temporary and permanent IT, attorney and
paralegal placements. The Company believes that The DeltaGroup
is now among the top five temporary staffing companies to the
legal community in New York City.
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Following the acquisition of Deltaforce, the Company made a
considerable investment in systems and process improvements to
create a new and improved infrastructure to enhance client
servicing, applicant recruitment and overall productivity. These
systems, which are specific to the staffing industry, provide The
DeltaGroup with the platform to grow without incurring additional
administrative costs. With the integration of WordSmiths into
the Deltaforce operation, the company was able to realize
economies of scale concurrent with improving overall performance
and serving the growing client base more efficiently.
In the temporary staffing industry, quality of service is
generally a function of two things: (i) the ability to
effectively match an individual worker to a specific assignment,
and (ii) the promptness with which the assignment is filled. The
Company believes that the experience of its management and
internal staff and its standing in the market allows it to
effectively access a large supply of available temporary workers,
select suitable individuals for a particular assignment and, in
some cases, train available workers in skills required for an
assignment.
Competition
The DeltaGroup competes against local and national temporary
personnel firms, both to recruit and retain a supply of worker
and to attract customers to use temporary employees. Many of the
firms that the Company competes with have greater financial
resources available for marketing and advertising as well as a
larger pool of potential candidates to fill positions. The
Company believes that it can compete against these firms due to
the experience of existing management, the relationships that it
has maintained over the years, and the reputation that it holds
in the market for providing high quality service. The Company
recruits temporary workers through a wide variety of means,
principally personal referrals and advertisements. In addition,
The DeltaGroup has installed a new state-of-the-art computer
system specifically designed for the temporary personnel
industry, which allows it to effectively match candidates with
assignments in a timely and efficient manner. Further, as a
result of The DeltaGroup's affiliation with Paratech, the Company
believes The DeltaGroup can create additional opportunities to
place candidates in IT related disciplines.
Customer Concentration
The DeltaGroup's typical clients are large New York City
based law firms with on-going needs for temporary personnel
services. The Company believes that its business is not
dependent on any single customer. For the year ending December
31, 1998, the three largest customers of The DeltaGroup accounted
for 17.1% of total sales. The loss of any of these major
customers could have a material adverse effect on the Company's
business, financial condition and results of operations.
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LEASE FINANCE BUSINESS
Industry Background
The large system computer industry has been characterized by
frequent technological advances resulting in cost reductions,
increases in computer processing capacity and broadened user
applications. The introduction of new models generally does not
result in equipment currently in service becoming technologically
obsolete, but usually causes the price of existing equipment to
decrease, reflecting the increased performance and
cost-effectiveness of newer equipment. Users frequently replace
or upgrade equipment as their existing equipment becomes
inappropriate for their needs or as increased data processing
capacity is required.
Many end-users prefer to lease, rather than purchase,
computer equipment. Leasing provides the flexibility to upgrade,
add or replace equipment during or at the end of the initial
lease term; provides financing advantages, such as the
elimination of initial cash outlays and lower monthly payments;
does not result in a preference item for purposes of the
alternative minimum tax; places the risk of loss of residual
value on the lessor rather than the lessee; and permits the
lessee to account for operating leases as off-balance-sheet
financing thereby leaving the lessee's borrowing ability, debt to
equity ratio and current liabilities unaffected.
As more end-users become aware of the economic benefits of
leasing, they often turn to independent leasing companies.
Independent lessors, such Paramount, offer tailored financing and
flexible delivery, and can deliver financing for mixed systems
from different vendors. Responding to customers' demands, leasing
companies are becoming increasingly more flexible in terms of
lease duration, equipment upgrades and payment options. By more
accurately assessing the residual value associated with the price
of equipment, lessors have become better able to fine tune the
fixed monthly payment amount.
According to the U.S. Department of Commerce "trends and
forecasts for equipment leasing in the US", it is estimated that
nearly $180 billion worth of equipment was leased in 1997 with a
forecasted amount of $183.4 billion in 1998. Of the total
equipment leased in 1997, nearly $10.5 billion was computer and
computer related products.
Operations
The Company's leasing operations involve the leasing of new
or used high technology equipment to computer end-users
nationwide. The majority of the Company's end-user customers are
Fortune 1000 and equivalent companies with large data processing
needs. The Company offers its customers a variety of choices for
their data processing needs, including equipment manufactured by
IBM, Hitachi Data Systems, Amdahl Corporation, EMC Corporation,
Sun Microsystems Inc., Hewlett-Packard Co., Storage Technology
Corp. and Xerox Corp., and includes mainframe and midrange
central processing units, peripheral devices, upgrades and
component parts; client servers; LAN and WAN equipment;
telecommunications equipment; and personal computers.
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Furthermore, through the Company's system integration
business, Paramount is positioned to offer lease finance
arrangements to customers of Paratech. The Company views this
"vertical integration" as not only a strategic advantage for
Paratech, but also as an additional source of obtaining quality
assets and customers for the Paramount lease portfolio. As the
business of Paratech continues to expand, the Company anticipates
that a significant portion of its new lease business will come
from transactions originated by Paratech.
The Company's objective is to conduct its leasing business
with customers whose creditworthiness permits the Company to
obtain long-term, non-recourse, fixed rate financing for its
lease transactions. All of the Company's equipment leases are
noncancellable, place the risk of damage or destruction to the
equipment on the lessee, have original terms typically ranging
from 24 to 60 months and are governed by a master lease agreement
(the "Master Lease"). The specific terms of each Master Lease
vary, but each creates a triple net lease obligation on the part
of the lessee. A Master Lease is an important marketing tool for
Paramount because it allows for multiple lease transactions with
the same customer without having to re-execute a new lease
agreement. Instead, each lease is documented by an equipment
schedule, which incorporates the terms of the Master Lease,
providing customers of Paramount with an easy and efficient means
of leasing equipment over time.
To minimize its cash investment in lease transactions, the
Company typically enters into non-recourse, fixed rate lease
financing with banks or other financial institutions. In
connection with such loans, the Company will (i) directly assign
to the lender providing financing the rental stream from the
lease, and (ii) grant that lender a security interest in the
equipment subject to the lease. In exchange for these
assignments, the Company receives up front from the lender a lump
sum payment equal to the discounted present value of the lease
payments, based on an interest rate commensurate with the
lessee's credit rating. In the event of the lessee's default, the
lender can look only to the lessee and the equipment for
repayment and not to the Company, unless the Company is in breach
of a material representation or warranty under the loan. Since
its inception, none of the Company's lessees have defaulted under
their leases. Throughout the term of the lease, the Company
retains title to the equipment.
In connection with its leasing of computer products to its
end-user customers and depending on the type of computer
equipment involved, the Company's relationship with the end-user
and the term of the lease, the Company may make a "residual
value" investment in these leased assets. A residual value
investment represents the difference between the acquisition cost
of the leased asset to the Company and the discounted present
value of the rental stream from the lessee. The Company plans to
maximize the return on its residual value investments through
creative and diligent remarketing activities, including mid-term
extensions, upgrades and early terminations.
Prior to or at the expiration of the initial lease term, a
lessee will often reassess and evaluate its high technology
needs. To this end, the Company consistently works with its
customers to develop strategies governing when to acquire
equipment, upgrade existing equipment and order new equipment to
take advantage of current technology. On many occasions, the
lessee will renew or extend its lease and add to or otherwise
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enhance the original equipment configuration. As a result, a
substantial portion of the Company's transactions are with repeat
customers.
The Company's remarketing strategy is to keep its equipment
in place at the end of the initial lease term. Prior to the
expiration of the original lease term, the Company initiates the
remarketing process for the related equipment. Typically,
remarketing equipment in place produces better residual returns
than selling or leasing the equipment to a third party. The
Company is able to maximize its revenues and residual return by
focusing its efforts on keeping the equipment in place at the end
of the initial lease term. In addition, leased equipment is
frequently upgraded and enhanced during the term of the lease,
and the Company looks to extend the term of the lease while
providing these upgrades.
The focus of the Company's activities with respect to
particular models of computer equipment changes periodically as a
result of changes in market conditions and advances in computer
technology. New product introductions and deliveries have
historically created opportunities to arrange leases, re-market
displaced equipment and provide upgrades. The Company believes
that its relationship with Paratech will provide the greatest
lease opportunities for Paramount in the future.
The Company maintains several informal relationships with
banks and other financial institutions for the purpose of
discounting lease transactions on a non-recourse basis. These
banks and financial institutions are in the business of
discounting lease transactions and actively look to acquire
transactions that meet their criteria of credit quality,
transaction size, term, documentation and rate. Prior to
committing to a lease transaction, the Company reviews the
creditworthiness and other key characteristics of the lease and
discusses the same with one or more of these banks or financial
institutions in an attempt to get prior approval for the
transaction, thereby avoiding the possibility of the Company
committing to a transaction that it would be unable to finance.
To the extent that a time lag exists between the date that the
Company must pay its vendors for the equipment to be leased and
the date that the non-recourse lease financing is funded, the
Company can and in limited circumstances has used its bridge
financing lines. In addition, the Company has entered into
recourse financing arrangements whereby certain financial
institutions finance the residual value investment of certain
equipment on lease. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and
Capital Resources."
The Company plans to selectively expand its computer lease
portfolio, while also repositioning Paramount to act as the
financing division for transactions generated by Paratech.
The Company believes that it can considerably mitigate the
risks associated with residual value investments. The Company
intends to make these residual value investments on a
conservative and select basis. These investments will be made at
accounts where the Company has developed a strong working
relationship with the data processing and financial officers. The
residual value investment will be based heavily on this
relationship and the end-user's historical tendencies to either
upgrade equipment and extend leases prior to expiration, or to
return equipment at lease expiration. In addition, the Company
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will utilize its experience in computer hardware in determining
the extent of its residual value investments. Each situation will
be analyzed separately with particular focus on the possible
upgrade paths of the hardware, the potential for technological
changes which may reduce the comparative efficiency of the
equipment, and the Company's knowledge of the end-users and their
likely growth plans for the future. In addition, the Company will
consult with published reports by independent appraisal services
to gauge its investments. On an annual basis, the Company will
compare its residual investments to these published reports and
make write-downs if a reduction in value is deemed to be
permanent.
The Company's strategy is to create a diversified portfolio
of computer hardware at high quality end-user accounts in various
industries. By diversifying along product lines, expiration date
and end-user accounts, the Company believes that it protects
itself against any one product, customer or industry experiencing
a significant downturn. In addition, the Company intends to take
a pro-active approach to managing its portfolio of computer
equipment on lease. This involves consistently meeting with users
and understanding their particular needs. A significant component
to this approach is the management of information regarding the
portfolio. By diligently monitoring its portfolio, keeping aware
of new product availability and trends, and maintaining strong
working relationships with its end-user customers, the Company
believes that it can minimize the costs associated with making
residual value investments and maximize the profit of owning the
assets.
The Company, like other competing computer sales and leasing
companies, does not grant any warranties on the products it sells
or leases. However, most of the new and used computer equipment
which the Company sells and leases is covered under either the
manufacturer's warranty or the manufacturer's maintenance
program, or is acceptable to be covered under the manufacturer's
maintenance program, and the Company represents this status to
the buyer. Prior to buying any used equipment, the Company
obtains a guarantee from the seller that the equipment is
acceptable under the manufacturer's maintenance program. Under
each Master Lease, all costs associated with product maintenance
must be borne and undertaken by the lessees.
Competition
The computer leasing industry is characterized by intense
competition. Companies compete for accounts through a variety of
factors. The Company believes it competes on the basis of price,
responsiveness to customer needs, flexibility in structuring
lease transactions, relationships with customers and vendors and
knowledge of the equipment. Further, the Company has a network
of lenders to discount the rental streams at what the Company
believes are favorable competitive rates. In addition, the
Company believes that it has an efficient back office operation
which allows it to keep its overhead low, thus requiring a lower
sales threshold on each transaction. Another important
competitive factor is customer service. The Company has attempted
to take a "hands-on" approach with its customers in order to
build and maintain long-term, mutually beneficial relationships,
and the Company believes that this relationship-building approach
has distinguished Paramount from some of its competitors. In
addition, as an independent lessor and trader of equipment,
Paramount is able to deliver a wide variety of equipment to its
customers on a timely basis.
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The Company's continued ability to compete effectively may
be affected by the policies of IBM, Hitachi and other computer
manufacturers. The Company attempts to provide customers with a
diverse selection of products, a high level of customer service,
the knowledge and competence of its employees and competitive
pricing. The Company believes that the knowledge and experience
of its executive officers and the relationships that they have
fostered in the industry will continue to provide the Company
with competitive advantages in the marketplace.
Customer Concentration
The Company's typical leasing customers are large,
creditworthy corporations that require several million dollars of
equipment per year and are repeat customers of the Company.
Repeat business generated through existing relationships is an
important source of revenue for the Company. While the Company
believes that its business is not dependent on any single
customer, as of December 31, 1998, the three largest lessees of
the Company accounted for 87.1% of the original acquisition cost
of all equipment leases owned and managed as of such date. The
loss of any of these major customers could have a material
adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of December 31, 1998, the Company employed 53 full-time
employees and 536 temporary part-time employees. The Company has
experienced no work stoppages and considers its employee
relations to be satisfactory. None of the Company's employees are
represented by a labor union.
GOVERNMENT REGULATION
The Company has not been materially affected by any
government regulations applicable to its business activities.
10
<PAGE>
ITEM 2 - PROPERTIES
PROPERTIES
The Company leases approximately 2,734 square feet of office
space for its principal executive offices at One Jericho Plaza,
Jericho, New York 11753. Payment of rent for the Company's
offices is approximately $6,000 per month. This lease expires in
August 1999. The Company intends to lease a larger space for its
executive offices upon termination of this lease, the rent for
which is expected to be at a higher monthly rate.
In addition, the Company leases 6,000 square feet in
Manhattan for The DeltaGroup operations. Payment of rent is
approximately $13,000 per month. This lease expires in November
2002.
ITEM 3 - LEGAL PROCEEDINGS
There are no material legal proceedings pending against the
Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security-holders
during the fourth quarter of the fiscal year ended December 31,
1998.
11
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock and Class A Warrants began
trading separately on the Nasdaq SmallCap Market under the
symbols "PARA" and "PARAW," respectively, on January 22, 1996,
the date of the Company's initial public offering. The following
table sets forth the high and low closing prices for the
Company's Common Stock for the periods shown below. Prices shown
for periods prior to May 19, 1998 have been adjusted to reflect
the Company's one-for-four reverse stock split at that time.
COMMON STOCK
1997 High Low
---- ---- ---
First quarter . . . . . . . . . . . . $3 1/8 $1 1/2
Second quarter . . . . . . . . . . . 3 1/4
Third quarter . . . . . . . . . . . . 4 3/8 1 1/2
Fourth quarter . . . . . . . . . . . 4 1/8 2 1/8
1998 High Low
---- ---- ---
First quarter . . . . . . . . . . . . 2 3/4 1 1/2
Second quarter . . . . . . . . . . . 2 5/16 1 1/16
Third quarter . . . . . . . . . . . . 1 3/16 19/32
Fourth quarter . . . . . . . . . . . 29/32 7/16
1999
----
January 1, 1999 through March 18, 1999 6 17/32
As of August 20, 1998, the Class A Warrants were delisted from
the Nasdaq SmallCap Market as a result of the failure to meet
the minimum market maker requirement. Set forth below in the
first table are the high and low closing prices for the Class
A Warrants as reported by the Nasdaq SmallCap Market from
January 1, 1997 through August 20, 1998. Set forth below in
the second table are the high and low sales prices for the
Class A Warrants as reported by the Nasdaq Over-The-Counter
Bulletin Board since August 21, 1998.
CLASS A WARRANTS
NASDAQ SMALLCAP MARKET
1997 High Low
---- ---- ---
First quarter . . . . . . . . . . . . $5/32 $3/97
Second quarter . . . . . . . . . . . 3/32 3/97
Third quarter . . . . . . . . . . . . 3/16 3/97
Fourth quarter . . . . . . . . . . . 3/16 1/16
12
<PAGE>
1998
----
First quarter . . . . . . . . . . . . 1/8 3/32
Second quarter . . . . . . . . . . . 3/32 1/32
Third quarter (July 1 August 20) . . 1/32 1/64
NASDAQ OVER-THE-COUNTER BULLETIN BOARD
1998 High Low
---- ---- ---
Third Quarter (beginning August 21)(1) DNT DNT
Fourth Quarter(1) . . . . . . . . . . 1/200 1/200
1999
----
January 1, 1999 through March 18, 1999 1/4 1/500
______________________
1 After being delisted from the Nasdaq SmallCap Market, the Class A
Warrants did not begin trading on The Over-The-Counter Bulletin Board
until December 1998.
The closing sales price of the Common Stock as of March 18,
1999, as reported by the Nasdaq SmallCap Market, was $2-5/32 per
share. The closing sales price of the Class A Warrants as of
March 19, 1999, as reported by the Nasdaq Over-The-Counter
Bulletin Board, was $0.01 per Warrant.
As of March 18, 1999, there were 40 record holders of the
Common Stock.
13
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
-----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales and
service . . . . $25,290,524 $30,857,949 $27,159,894 $21,405,788 $30,391,446
Lease revenue . 2,592,531 2,147,358 3,680,924 9,829,991 7,478,750
Fee, interest
and other 109,247 162,873 511,698 1,159,062 615,295
income . . . . ---------- ---------- ---------- ---------- ----------
27,992,302 33,168,180 31,352,516 32,394,841 38,485,491
Total revenues ---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales . 23,540,952 28,955,984 25,785,022 19,933,213 28,157,266
Lease expense . 2,091,361 1,828,412 3,419,600 9,499,365 7,172,273
Selling,
general and
administrative
expenses . . . 1,680,601 1,805,499 2,447,884 3,746,712 4,947,718
Interest - 5,284,756 6,209 - 51,324
expense . . . ---------- ---------- ---------- ---------- ----------
Total costs and 27,312,914 37,874,651 31,658,715 33,179,290 40,328,581
expenses . . . ---------- ---------- ---------- ---------- ----------
Income (loss)
before provision
for (benefit
from) taxes . 679,388 (4,706,471) (306,199) (784,449) (1,843,090)
Provision for
(benefit
from) income 33,706 21,850 498,212 (288,111) (9,286)
taxes . . . . ---------- ---------- ---------- ---------- ----------
Net income $ 645,682 $(4,728,321) $ (804,411) $ (496,338) $(1,833,804)
(loss) . . . . ========== ========== ========== ========== ==========
Basic loss per
common share . ($0.41) ($0.25) $(0.89)
========== ========== ==========
Diluted loss
per common
share . . . . ($0.41) (0.25) $(0.89)
========== ========== ==========
Shares used in
computing net
loss per share:
Basic 1,954,493 1,991,117 2,067,842
========== ========== ==========
Diluted 1,954,493 1,991,117 2,067,842
========== ========== ==========
</TABLE>
14
<PAGE>
1994 1995 1996
---- ---- ----
BALANCE SHEET DATA:
Total assets . . . . . . . $8,128,970 $12,378,585 $51,561,520
Obligations for financial
equipment - non-recourse 5,152,274 9,337,883 23,461,175
Shareholders' equity . . . 851,999 568,718 8,171,386
LEASE PORTFOLIO DATA:
Net investment in direct
finance and sales-type
leases . . . . . . . . . . 5,411,219 6,446,063 20,942,542
Assets held under operating
leases, net of accumulated
depreciation . . . . . . . 846,126 3,976,209 21,103,033
1997 1998
---- ----
BALANCE SHEET DATA:
Total assets . . . . . . . $53,062,461 $45,246,610
Obligations for
financial
equipment -
non-recourse . . . . . . . 40,287,404 33,435,459
Shareholders' equity . . . 7,645,683 5,797,139
LEASE PORTFOLIO DATA:
Net investment in
direct finance
and sales-type
leases . . . . . . . . . . 39,941,764 30,059,378
Assets held under
operating leases,
net of accumulated
depreciation . . . . . . . 5,459,895 7,263,181
15
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with, and is qualified in its entirety by, the
audited financial statements, including the notes thereto,
appearing elsewhere in this Form 10-K.
GENERAL
Paramount Financial Corporation and subsidiaries is a
comprehensive business solution provider, offering customers a
wide range of integrated services, including lease finance,
information technology consulting, network design and
implementation and staffing services. The Company includes two
wholly owned subsidiaries, Paratech Resources, Inc. and
Deltaforce Personnel Services, Inc.
During the year ended December 31, 1998, the Company
continued with its strategic diversification and expansion plans.
In January, the Company completed the acquisition of Deltaforce
Personnel Services, Inc., a privately held New York City based
staffing company specializing in legal support staff. This
acquisition further enhanced the Company's product offerings by
including staffing services to its expanding list of integrated
services. The Deltaforce acquisition was followed closely by the
acquisition of RBW Staffing Services, Inc. (d/b/a WordSmiths),
another New York City based staffing company. Following this
second acquisition, the Company merged the operations of
WordSmiths and Deltaforce, and the combined company (called The
DeltaGroup) now offers not only temporary legal support staff,
but also temporary and permanent IT, attorney and paralegal
placements.
In addition to the Deltaforce and WordSmiths acquisitions
during the year ended December 31, 1998, the Company continued to
invest in the expansion of its systems integration subsidiary,
Paratech. Paratech continues to move ahead with its growth plans
in both personnel and product offerings. In October 1998, the
Company completed the acquisition of Comptech Resources, Inc., a
systems consulting, software application and Internet commerce
development firm. The acquisition of Comptech brought to
Paramount a specialization in client-server accounting, sales-
force automation, web development and e-commerce applications,
which when combined with Paratech's systems integration and
consulting services, enables the Company to offer a full
complement of state-of-the-art technology solutions.
Both Paratech and The DeltaGroup are important parts of the
evolution of Paramount from a lease finance company to a
diversified business solution provider. When comparing the year
ended December 31, 1998 to the year ended December 31, 1997, it
is important to note that The DeltaGroup and Comptech were not
part of the Company in 1997.
The Company remains committed to the growth of its lease
portfolio and continued to engage in this activity during the
year ended December 31, 1998. The Company believes that
continued expansion of the portfolio of IT equipment on lease
will create financial benefits over a continuum of time, since,
unlike other equipment, IT equipment is frequently upgraded
16
<PAGE
and/or enhanced during the term of its lease, resulting in
opportunities to lease new equipment and market displaced
equipment. Further, as an integrated lessor and business
solution provider, the Company believes that it is well
positioned to meet the ever-changing needs of its customers.
FLUCTUATIONS IN QUARTERLY RESULTS
The operating results of Paramount are subject to quarterly
fluctuations resulting from a variety of factors, including the
volume of new leases written, product announcements by
manufacturers, economic conditions, interest rate fluctuations
and variations in the mix of leases written. In addition, the
Company's revenue can fluctuate significantly from quarter to
quarter based on the closing date and nature of each particular
lease and/or sales transaction. The mix of leases written in a
quarter is a result of a combination of factors, including
changes in customer demands and/or requirements, new product
announcements, price changes, changes in delivery dates, changes
in maintenance policies and pricing policies of equipment
manufacturers and price competition from other lessors.
Leasing transactions (other than sales-type leases), in
general, do not provide for significant earnings in the month of
lease origination. Instead, revenue, expense and profit from
lease transactions are recorded over the life of the asset and
the lease. Lease revenue and lease expense recognition is
dependent upon a number of factors, including the term of the
lease, the accounting classification of the lease (i.e.,
operating, direct finance, or sales-type) and the commencement
date of the lease and the lease financing within a particular
period. See "Lease Accounting."
The Company is aggressively working to maximize the returns
on the residual value investments made on its lease portfolio.
Such efforts, which are an ordinary but not a predictable part of
the Company's business, often result in equipment originally
leased under an operating lease, and accounted for as described
below, being upgraded or otherwise enhanced and extended at the
original account or leased to a different end-user. The
resulting lease may qualify under Statement of Financial
Accounting Standard No. 13, "Accounting for Leases" ("SFAS 13")
as a sales-type lease, in which the Company can record as sales
revenue the fair market value of the equipment and recognize as
income the difference between this amount and the equipment's
cost or net book value. Since a sales-type lease is a form of
direct finance lease, the new lease is recorded over its
remaining term as a direct finance lease resulting in a reduction
of lease rental income and lease expense compared to the original
operating lease accounting.
Marketing efforts may also result in the sale of the leased
asset to the customer which will result in an increase in
revenue, and to the extent the sales proceeds exceed the net book
value, net income, in the quarter in which the sale occurs. Any
such sale will also result in a reduction of revenue, expense and
profit expected in subsequent quarters since the equipment was
sold.
17
<PAGE>
Given the possibility of such fluctuations as described
above, the Company believes that comparisons of the results of
its operations for preceding quarters are not necessarily
meaningful and that such results for one quarter should not be
relied upon as an indication of future performance.
LEASE ACCOUNTING
In accordance with SFAS 13, the Company classifies its
leases as either operating leases or direct finance leases. The
allocation of income among accounting periods within a lease term
will vary depending upon the lease classification, as described
below.
Direct Finance Leases: Direct finance leases transfer
substantially all benefits and risks of equipment ownership to
the lessee. A lease is a direct finance lease if it meets one of
the following criteria: (i) the lease transfers ownership of the
equipment to the lessee by the end of the lease term; (ii) the
lease contains a bargain purchase option; (iii) the lease term at
inception is at least 75% of the estimated economic life of the
leased equipment; or (iv) the present value of the minimum lease
payments is at least 90% of the fair value of the leased
equipment at lease inception.
At lease inception, the cost of equipment under a direct
finance lease is recorded as "Net investment in direct finance
leases". The difference between the gross lease payments
receivable, plus the estimated residual value of the equipment,
and the equipment cost is recognized as income over the life of
the lease using the effective interest method.
A lease transaction which meets all of the above criteria,
and in which the Company has made a dealer's profit, is recorded
as a "sales-type lease". A sales type lease is a type of direct
finance lease, but one in which the Company recognizes, at lease
inception, revenue and profit which arises from the difference
between the fair market value of the leased equipment and its
acquisition cost.
Operating Leases: All lease contracts which do not meet the
criteria of direct finance leases are accounted for as operating
leases. Monthly lease payments are recorded as operating lease
revenue. Leased equipment is recorded at the Company's cost and
depreciated on a straight-line basis over the lease term to the
estimated residual value at the expiration of the lease term.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31,
1997
The Company recorded a net loss for the year ended December
31, 1998 of $1,833,800, after a benefit for income taxes of
$9,300, as compared with a net loss of $496,300, after a benefit
for income taxes of $288,100, for the year ended December 31,
1997.
18
<PAGE>
For the year ended December 31, 1998, the Company recorded
sales and service revenue of $30.4 million, a $9.0 million
increase over the $21.4 million recorded during the year ended
December 31, 1997. The increase was primarily a result of the
transactional nature of the Company's leasing business and the
resulting quarterly fluctuations. See "General" and
"Fluctuations in Quarterly Results." Additionally, Paratech's
revenue increased by 43% to $5.4 million when compared with 1997.
The DeltaGroup (comprised of Deltaforce and WordSmiths), which
were not part of the Company in 1997, contributed $3.9 million in
revenue during the 1998 year.
As a result of the Company's ongoing marketing efforts with
respect to its lease portfolio, certain assets which were
recorded as operating leases during the year ended December 31,
1997 have been upgraded and re-leased, providing the Company with
a return on its residual value investment. The resulting lease
has been accounted for as a sales-type lease. As a result of
this activity, the effect of accounting for a lease as a direct
finance lease versus an operating lease, net of new leases
written in the fourth quarter, lease revenue and lease expense
decreased for the year ended December 31, 1998 when compared to
the year ended December 31, 1997 by 23.9% and 24.5%,
respectively. See "Fluctuations in Quarterly Results" and "Lease
Accounting."
During the year ended December 31, 1998, the Company entered
into new lease transactions totaling $19.9 million of equipment
cost as compared with $38.5 million for the year ended December
31, 1997. During the year ended December 31, 1998, the Company
entered into $19.1 million of non-recourse lease financing
arrangements, as compared with $38.5 million for the year ended
December 31, 1997. See "Liquidity and Capital Resources."
During the year ended December 31, 1998, the Company
generated $615,000 in fee, interest and other income, compared to
$1.2 million in 1997. Generally, fee income is generated as a
result of the Company's involvement in certain transactions in
which it acted as an arranger of financing for leases originated
by third parties, or otherwise assisted these companies in their
lease related transactions. These transactions come about as a
result of the Company's relationship with other lessors and
financial institutions. The Company cannot predict with any
certainty the timing and nature of any future such transactions.
See "General."
Selling, general and administrative expenses ("SG&A")
totaled $4.9 million for the year ended December 31, 1998,
representing an increase of 32.0% over the $3.7 million recorded
during the year ended December 31, 1997. The increase in SG&A is
attributed to the acquisitions of Deltaforce and WordSmiths,
which contributed $1.3 million, as well as the acquisition of
Comptech and the continued growth of Paratech, which contributed
$1.4 million
The Company recorded a tax benefit of $9,300 for the years
ended December 31, 1998 and 1997, respectively. The income tax
benefit for the year ended December 31, 1998 was reduced by a
valuation allowance on the Company's net deferred tax asset. The
Company will continue to assess the fully reserved deferred tax
asset each reporting quarter. The benefit from income taxes of
19
<PAGE>
$288,100 for the year ended December 31, 1997 reflects an
effective tax rate of 37%.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,
1996
The Company recorded a net loss of $496,300 for the year
ended December 31, 1997, as compared to a net loss of $804,400
for the year ended December 31, 1996. The results for the year
ended December 31, 1996 include a one time, non-cash adjustment
of $430,400 to Provision for Income Taxes. This adjustment was
necessitated by the change of the Company's tax status from a
Sub-Chapter S Corporation to a C-Corporation in connection with
the Company's January 1996 initial public offering, and was made
in accordance with Statement of Financial Accounting Standards
No. 109. The amount of the adjustment represents the cumulative
deferred tax liability, which arose primarily from temporary tax
differences with respect to depreciation, generated by the S-
Corporation and payable in the future by the C-Corporation. The
net loss for the year ended December 31, 1997 was a result of the
Company's continued investment in the growth and expansion of its
system integration subsidiary, as well as the nature and timing
of certain lease transactions. See "General" and "Lease
Accounting."
During the year ended December 31, 1997, the Company
recorded $21.4 million of sales and service revenue, representing
a decrease of $5.8 million over the $27.2 million recorded during
1996. The reduction in sales revenue was a result of a decrease
in the dollar amount of sales type leases entered into during
1997, and the continued shift in focus of the Company towards
system integration sales. See "General" and "Lease Accounting."
Lease revenue, comprised of rental income from operating
leases and interest income from direct finance and sales-type
leases, increased by 167% to $9.8 million for the year ended
December 31, 1997 from $3.7 million for the year ended December
31, 1996. Lease expense, which includes depreciation expense on
operating leases, interest expense on lease financing and
sublease rent expense, increased by 177% to $9.5 million for the
year ended December 31, 1997 from $3.4 million for the year ended
December 31, 1996. These increases were a direct result of the
Company's continuing efforts to expand its leasing portfolio.
See "General" and "Lease Accounting."
During the year ended December 31, 1997, the Company entered
into new lease transactions totaling $38.5 million of equipment
cost. Of this amount, $11.9 million was for sales-type leases
for which the sales price and cost of equipment were recorded as
sales revenue and cost of sales, respectively. This compares
with $53.7 million for the year ended December 31, 1996, of which
$12.4 million was subsequently sold to an equipment investor,
$21.8 million was recorded as direct finance or sales-type leases
and $19.5 million was recorded as operating leases. During the
year ended December 31, 1997, the Company entered into $35.4
million of non-recourse lease financing arrangements, net of
terminations resulting from lease extensions, as compared with
$21.6 million for the year ended December 31, 1996. See
"Liquidity and Capital Resources."
20
<PAGE>
During the year ended December 31, 1997, the Company
generated $1.2 million in fee, interest and other income,
compared to $511,700 for the comparable period in 1996. The
Company generates fee income from commissions earned on third
party lease financing transactions. These transactions generally
come about as a result of the Company's relationship with other
lessors and financial institutions. The Company cannot predict
with any certainty the timing and nature of any future such
transactions. See "General." Interest income is derived from
the investment of the Company's cash balances in interest bearing
cash accounts, cash equivalents and marketable securities during
the periods ended December 31, 1997 and 1996.
SG&A totaled $3.7 million for the year ended December 31,
1997, representing an increase of 53.1% over the $2.4 million
recorded during 1996. The increase in SG&A was a result of the
expansion of the operations of Paratech and the increased sales
and support staff at the Company. See "General."
The benefit from income taxes of $288,100 for the year ended
December 31, 1997 reflects an effective tax rate of 37% for
federal and state taxes. The tax provision of $498,200 for the
year ended December 31, 1996 represents the cumulative adjustment
of $430,400, described above, plus a provision of $67,800.
Prior to 1996, the Company was an S-Corporation and not subject
to a corporate federal income tax.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $2.1 million in
cash and cash equivalents and investments available for sale.
Substantially all of this amount was invested in interest-bearing
savings accounts, money market accounts established by major
commercial banks or in United States Government, other AA rated
obligations and mutual funds. Primarily as a result of the
acquisitions of Deltaforce, WordSmiths and Comptech, the
continued investment in Paratech, and the Company's continuing
investment in its portfolio of IT equipment on lease, the Company
experienced a reduction in net cash and investments available for
sale during 1998.
The Company continues to use its cash balances to fund its
operations. The Company believes that its businesses are now
established and, accordingly, does not anticipate the need to
invest significant additional cash. However, in order to expand
its operations, which the Company is aggressively seeking to
accomplish, the Company will need to utilize its cash balances to
fund potential future acquisitions. The Company is limited to
its current cash balances for funding such add-on acquisitions
and internal growth, unless the Company is able in the future to
raise significant additional financing. There can be no
assurance that the Company will be able to raise any such
financing. Further, the Company's cash funds for acquisitions
might be limited to the extent that the Company's current
operations or the operations of any future acquisitions require
the funding of losses or the incurrence of capital outlay.
21
<PAGE>
The Company's leasing business generates cash primarily from
the marketing of equipment within its portfolio, and uses cash to
acquire computer equipment to put on lease. In addition, the
Company's leasing business generates cash from fee related
transactions. The Company finances substantially all of its
leases by discounting the payment stream on a non-recourse basis
through various banks and financial institutions. Thus, the only
cash required in these lease transactions is the residual value
investment by the Company. The Company believes that it
currently has sufficient resources to make the residual value
investments required to grow its lease portfolio. In addition,
the Company has numerous options available to finance residual
value investments, including sales of equipment on lease to
equipment investors, residual value sharing arrangements,
recourse loans and non-recourse loans. The Company intends to
use, on an opportunistic basis, all such available resources in
order to maximize its portfolio of equipment on lease.
During the year ended December 31, 1998, the Company entered
into several residual value sharing and financing arrangements
with an equipment investor totaling $856,000. This investor (i)
purchased a portion of the Company's residual value of equipment
on lease in exchange for the right to share in remarketing
proceeds generated from the equipment on lease, and (ii) provided
recourse financing for the remaining portion of the Company's
residual value investment. The equipment on lease and the
related leases serve as collateral for these financings. During
the year ended December 31, 1998, in connection with the early
extension of leases, the Company repaid $1,580,000 of such loans
using the proceeds of these extensions. The Company expects to
repay the balance of these loans through the proceeds generated
from remarketing the subject equipment in the future. These
transactions allow the Company to continue to grow and expand its
lease portfolio without significantly affecting its current cash
balances.
At December 31, 1998, the Company had three types of credit
lines available:
Term Loan: In April 1998, Paramount entered into a $500,000 term
loan with a bank collateralized by $600,000 in cash maintained in
an investment account. Principal payments of approximately
$41,600 and interest are due on a quarterly basis through April
20, 2001. As of December 31, 1998, approximately $417,000
remained outstanding under this loan.
Deltaforce Revolving Credit Facility: Deltaforce has a $750,000
revolving line of credit agreement with a bank secured by
accounts receivable which expires on June 30, 1999. Interest on
outstanding borrowings accrues at the bank's prime rate plus 1%.
Borrowings are limited to 80% of eligible accounts receivable.
As of December 31, 1998, Deltaforce had $600,000 outstanding
under this line.
Paratech Equipment Acquisition Credit Facility: Paratech has a
$2,000,000 revolving line of credit agreement with a finance
company secured by accounts receivable and inventory. Interest
on outstanding borrowings accrues at the prime rate plus 1 1/2%.
Borrowings are limited to 85% of eligible accounts receivable and
99% of eligible inventory. This facility allows the Company to
purchase computer hardware from its vendors with net 30-day terms
interest free. At the expiration of the net 30-day period, the
Company has the option of paying the amount due or, provided the
Company has sufficient eligible collateral, borrowing under the
22
<PAGE>
credit facility. As of December 31, 1998, Paratech had $464,000
outstanding under this line.
In addition, in connection with the acquisition of Comptech,
the Company assumed all outstanding obligations under a similar
arrangement between Comptech and the same finance company. The
amount assumed, $2.2 million, is being repaid through the
collection of Comptech's accounts receivable and the sale of
their inventory. As of December 31, 1998, approximately $440,000
remained outstanding under this facility, but as of March 12,
1999, $10,000 remained outstanding. This facility must be repaid
in full by July 23, 1999.
During the year ended December 31, 1997, the Board of
Directors of the Company approved a plan that would allow for the
repurchase of up to $500,000 worth of Common Stock of the
Company. The repurchase program took effect immediately and is
authorized to continue for a period of two years. Subject to
applicable rules, the plan allows the Company to repurchase
shares at any time during the authorized period in any increments
it deems appropriate. During the year ended December 31, 1998,
the Company repurchased 12,000 shares for a purchase price of
$21,240
IMPACT OF YEAR 2000 ISSUE
Many existing computer programs use only two digits to
identify a year. These programs were frequently designed and
developed without addressing the impact of the upcoming change in
the century. If not corrected, many computer software
applications could fail or create erroneous results before, at or
beyond the Year 2000.
The Company has developed a Year 2000 Readiness Plan. This
plan addresses three main areas: (a) information technology
systems (including the Company's business systems, both
hardware and software-related), (b) non-information technology
systems (including embedded technology, such as microcontrollers,
typically found in such equipment as telephone systems, fax
systems, elevators, security systems, HVAC, etc.), and (c) supply
chain readiness or third party issues (including customers as
well as inventory and non-inventory suppliers).
The Company has not identified any material potential
deficiencies related to Year 2000 in its information technology
systems. The Company upgraded its business and computing system
in 1997 and believes it is now Year 2000 complaint (based upon
warranties from the Company's software providers). The Company
expects to complete testing (and, if necessary, remediation
and/or replacement) of its internal systems in the second quarter
of 1999. In terms of non-information technology systems, the
Company will be identifying those material items which may
require remediation or replacement. The Company is in the
process of addressing those items and expects to complete testing
(and, if necessary, remediation and/or replacement) of its non-
information technology systems in the second quarter of 1999.
As for third parties, the Company is in the process of
identifying and contacting suppliers, both inventory and non-
inventory, as well as customers. This process includes the
23
<PAGE>
solicitation of written responses to questionnaires and/or
meetings with certain third parties. With respect to the
Company's network integration services and solutions business
conducted through Paratech, the most significant focus is to sell
to Paratech's customer Year 2000 compliant IT equipment, which
Paratech accomplishes by deploying only Year 2000 level hardware
and software. With respect to Paramount's leasing business, in
connection with the leasing of new IT equipment, the Company
almost always leases such IT equipment from the largest
manufacturers, thereby assuring that such equipment will be Year
2000 compliant. With respect to the leasing of older equipment
coming off lease (or otherwise), such equipment is re-leased
either as Year 2000 compliant or non-compliant, with the customer
fully informed on the status (such re-leased equipment is
frequently upgraded to Year 2000 compliance before re-leasing).
In any event, the Company, like other IT equipment leasing
companies, does not grant any warranties on the equipment it
leases, so that any Year 2000 problems ultimately are
manufacturers responsibilities.
Based upon the Company's current estimates, additional out-
of-pocket costs associated with its Year 2000 compliance are not
expected to be material. These costs are anticipated to be
incurred primarily in 1999 and include third party consultants,
and remediation or replacement of embedded chips. Such costs do
not include internal management time and the deferral of other
projects, the effects of which are not expected to be material to
the Company's results of operations or financial condition.
At this point in time, the Company believes that it is
difficult to specifically identify the cause of the most
reasonable worst case Year 2000 scenario. As with many non-
manufacturing/service-related businesses, a reasonable worst case
scenario would be the result of Year 2000 failures of third
parties (including, without limitation, governmental entities and
entities with which the Company has no direct involvement) that
continue for more than several days in specific industries from
which the Company's inventory and components are sourced or to
which the Company's products are sold. In connection with the
purchase of inventory and components, the Company is considering
various contingency plans. Continuing failures in these specific
industries would limit procurement or delivery of product, and
most likely would have a material adverse effect on the Company's
results of operations. The extent of such lost revenue cannot be
estimated at this time; however, the Company is considering
contingency plans to limit, to the extent possible, the effect of
such lost revenue on the Company's results of operations. Any
such plans would necessarily be limited to matters over which the
Company can reasonably control.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISK
Statements contained in this Form 10-K which are not
historical facts are forward-looking statements. The Forward-
looking statements in this Form 10-K are made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements made herein
contain a number of risks and uncertainties that could cause
actual results to differ materially. These risks and
uncertainties include, but are not limited to, the specific
factors impacting the Company's business discussed under the
caption "General," as well as increased competition; the
24
<PAGE>
availability of computer equipment; the ability of the Company to
expand its operations and attract and retain qualified sales
representatives experienced in the purchase, sale and lease of
new and used computer equipment; the ability of the Company to
attract and retain IT professionals skilled in specific
applications; technological obsolescence of the Company's
portfolio of computer equipment; competition in the IT consulting
sector and general economic conditions
INFLATION
Inflation has not had a significant impact on the Company's
operations.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's principal financial instrument is debt
consisting of revolving lines of credit and notes payable that
provide for interest at a spread above the prime rate. The
Company is affected by market risk exposure primarily through the
effect of changes in interest rates on amounts payable by the
Company under these credit facilities. A significant rise in the
prime rate could materially adversely affect the Company's
business and financial condition. At December 31, 1998, an
aggregate principal amount of $2.8 million was outstanding under
the Company's revolving lines of credit and notes payable, with
spreads ranging from 0.25% to 1.5% over prime, and representing a
weighted average interest rate of 9.15%. If principal amounts
outstanding under the Company's revolving lines of credit and
notes payable remained at this year-end level for an entire year
and the prime rate increased or decreased, respectively by 1.25%,
the Company would pay or save, respectively, an additional
$35,500 in interest in that year. The Company does not utilize
derivative financial instruments to hedge against changes in
interest rates or for any other purposes. The Company does not
have any material foreign sales and all transactions are
denominated in U.S. dollars.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company for the
fiscal year ended December 31, 1998 are located beginning at page
F-1 of this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
<PAGE>
PART III
ITEM 10 - ITEM 13 - DOCUMENTS INCORPORATED BY REFERENCE
Information with respect to Items 10, 11, 12 and 13 of Form
10-K is hereby incorporated by reference into this Part III of
Form 10-K from the Registrant's Definitive Proxy Statement
relating to the Registrant's 1999 Annual Meeting of Stockholders
to be filed by the Registrant with the Securities and Exchange
Commission on or before April 30, 1999.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
The exhibits listed in the Index to Exhibits below are filed
as part of this Annual Report on Form 10-K.
(A) EXHIBITS:
*3.1 - Restated and Amended Certificate of Incorporation
of the Registrant
*3.2 - Amended on Restated By-laws of the Registrant
*4.1 - Specimen Common Stock Certificate
*4.2 - Form of Underwriter's Unit Purchase Option, as
amended
*4.3 - Form of Class A and Class B Warrant Agreement, as
amended
*4.4 - Specimen Class A Warrant Certificate
*4.5 - Specimen Class B Warrant Certificate
*10.1 - Employment Agreement between Registrant and
Jeffrey Nortman dated as of January 22, 1996
*10.2 - Employment Agreement between Registrant and Glenn
Nortman dated as of January 22, 1996
*10.3 - Employment Agreement between the Registrant and
Paul Vecker dated as of January 22, 1996
*10.4 - Form of Master Lease Agreement relating to
Computer Equipment Leases
*10.5 - 1995 Stock Option Plan
**10.6 - Stock Purchase Agreement dated January 6, 1998 by
and among Paramount Financial Corporation and
Lawrence P. Kagan and Steven Lippel relating to
Deltaforce Personnel Services, Inc.
*10.7 - Form of Indemnification Agreement
*10.8 - Sublease Agreement, dated September 15, 1995,
between the Company and Lehman Brothers Inc.
*10.9 - Consent to Sublease, dated September 15, 1995,
among Chasco Company, Lehman Brothers Inc. and the
Company
*10.10 - 1995 Director Option Plan
26
<PAGE>
+10.11 - Stock Purchase Agreement dated October 23, 1998
between the Registrant and Abbey, Garrett & Seth,
Ltd. relating to Comptech Resources, Inc.
+10.12 - Asset Purchase Agreement dated July 28, 1998
between the Registrant and RBW Staffing Services,
Inc. relating to WordSmiths
+21 - List of Subsidiaries
+27 - Financial Data Schedule
-----------------------
+ Filed herewith.
* Incorporated by Reference from the Registrant's Registration
Statement on Form S-1, Registration No. 33-96382.
** Incorporated by reference from the Registrant's Form 10-K
for the year ended December 31, 1997.
FINANCIAL STATEMENTS: See Index to Consolidated
Financial Statements on page F-1.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
fourth quarter of the fiscal year ended December 31, 1998.
(C) EXHIBITS
The Exhibits set forth in (a) above are filed as part of
this Annual Report on Form 10-K.
(D) FINANCIAL STATEMENT SCHEDULES
Information required by schedules called for under
Regulation S-X is either not applicable or is included in
the financial statements or notes thereto.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
PARAMOUNT FINANCIAL CORPORATION
Dated: March 26, 1999 By: /s/ GLENN NORTMAN
----------------------------
Glenn Nortman,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ GLENN NORTMAN
---------------------- Chief Executive Officer March 26, 1999
Glenn Nortman and Director
(Principal Executive Officer)
/s/JEFFREY NORTMAN
---------------------- Chief Operating Officer March 26, 1999
Jeffrey Nortman and Director
/s/ANTHONY FERNANDEZ Director of Fiance March 26, 1999
---------------------- (Principal Financial Officer
Anthony Fernandez and Principal Accounting
Officer
/s/WILLIAM H. KELLY Director March 26, 1999
-----------------------
William H. Kelly
/s/LARRY AUSTIN
----------------------- Director March 26, 1999
Larry Austin
28
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARY
----------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1998
-----------------
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for each of the three F-4
years ended December 31, 1998
Consolidated Statements of Shareholders' Equity for each of F-5
three years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the F-6
three years in the period ended December 31, 1998
Notes to Consolidated Financial Statements F-7 - F-21
Information required by schedules called for under Regulation S-X is
either not applicable or is included in the financial statements or
notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Paramount Financial Corporation:
We have audited the accompanying consolidated balance sheets of
Paramount Financial Corporation and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Paramount
Financial Corporation and subsidiaries as of December 31, 1997 and
1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
March 12, 1999
F-2
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED BALANCE SHEETS
----------------------------
December 31,
-------------------------
ASSETS 1997 1998
------ ---- ----
Cash and cash equivalents $2,209,649 $1,495,082
Investments available for sale 3,524,456 613,188
Accounts receivable, net 1,138,479 2,632,258
Net investment in direct finance and
sales-type leases 39,941,764 30,059,378
Assets held under operating leases, net
of accumulated depreciation 5,459,895 7,263,181
Other assets 788,218 3,183,523
---------- ----------
Total assets $53,062,461 $45,246,610
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable $2,656,365 $4,313,189
Accounts payable 1,307,496 942,431
Accounts payable - leases 708,568 100,000
Accrued expenses 383,097 658,392
Obligations for financed equipment
- non-recourse 40,287,404 33,435,459
Deferred income taxes 73,848 -
---------- ----------
Total liabilities 45,416,778 39,449,471
---------- ----------
COMMITMENTS (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value;
5,000,000 shares authorized,
none outstanding - -
Common stock, $.04 par value;
17,500,000 shares
authorized, 1,997,500 and
2,160,000 shares issued and
outstanding, respectively 79,900 86,400
Additional paid-in capital 13,644,228 14,456,728
Stock subscription receivable - (812,500)
Accumulated deficit (6,049,080) (7,882,884)
Treasury stock, 12,500 and 24,500
shares, respectively (29,365) (50,605)
---------- ----------
Total shareholders' equity 7,645,683 5,797,139
---------- ----------
Total liabilities and
shareholders' equity $53,062,461 $45,246,610
=========== ===========
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Years Ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----
REVENUES:
Sales and Service $27,159,894 $21,405,788 $30,391,446
Lease revenue 3,680,924 9,829,991 7,478,750
Fee, interest and
other income 511,698 1,159,062 615,295
----------- ----------- -----------
Total revenues 31,352,516 32,394,841 38,485,491
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 25,785,022 19,933,213 28,157,266
Lease expense 3,419,600 9,499,365 7,172,273
Selling, general and
administrative
expenses 2,447,884 3,746,712 4,947,718
Interest expense 6,209 - 51,324
----------- ----------- -----------
Total costs and
expenses 31,658,715 33,179,290 40,328,581
----------- ----------- -----------
Loss before provision
for (benefit
from) income
taxes (306,199) (784,449) (1,843,090)
Provision For (Benefit
From) Income Taxes 498,212 (288,111) (9,286)
----------- ----------- -----------
Net loss $(804,411) $(496,338) $(1,833,804)
=========== =========== ===========
Basic loss per common share $(0.41) $(0.25) $(0.89)
=========== =========== ===========
Diluted loss per common
share $(0.41) $(0.25) $(0.89)
=========== =========== ===========
Shares used in computing
net loss per share:
Basic 1,954,493 1,991,117 2,067,842
=========== =========== ===========
Diluted 1,954,493 1,991,117 2,067,842
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
statements.
F-4
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
Common Stock Additional
------------------ Paid-In
Shares Amount Capital
------ ------ ----------
BALANCE, December 31, 1995 3,500,000 $35,000 $5,282,049
Issuance of common stock in
the initial public
offering, net of
offering costs of
approximately
$2,057,921 2,990,000 29,900 8,377,179
Issuance of common stock to
bridge lenders 1,500,000 15,000 (15,000)
Current year net loss - - -
--------- ------- -----------
BALANCE, December 31, 1996 7,990,000 79,900 13,644,228
Purchase of treasury
stock - - -
Current year net loss - - -
--------- ------- -----------
BALANCE, December 31, 1997 7,990,000 79,900 13,644,228
One-for-four reverse
stock split (5,992,500) - -
Issuances of common
stock 162,500 6,500 812,500
Purchase of treasury
stock - - -
Current year net loss - - -
--------- ------- -----------
BALANCE, December 31, 1998 2,160,000 $86,400 $14,456,728
========= ======= ===========
Stock
Subscription Accumulated Treasury
Receivable Deficit Stock Total
---------- ------- ----- -----
BALANCE,
December 31, 1995 $ - $(4,748,331) $ - $568,718
Issuance of common
stock in the
initial public
offering, net of
offering costs of
approximately
$2,057,921 - - - 8,407,079
Issuance of common
stock to bridge
lenders - - - -
Current year net loss - (804,411) - (804,411)
--------- ---------- ------- ---------
BALANCE, December 31, 1996 - (5,552,742) - 8,171,386
Purchase of
treasury stock - - (29,365) (29,365)
Current year net
loss - (496,338) - (496,338)
--------- ---------- ------- ---------
BALANCE, December 31, 1997 - (6,049,080) (29,365) 7,645,683
One-for-four
reverse stock
split - - - -
Issuances of
common stock (812,500) - - 6,500
Purchase of
treasury stock - - (21,240) (21,240)
Current year net
loss - (1,833,804) - (1,833,804)
loss --------- ----------- -------- ---------
BALANCE, December 31, 1998 $(812,500) $(7,882,884) $(50,605) $5,797,139
========= =========== ======== ==========
The accompanying notes are an integral part of these consolidated
statements.
F-5
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31,
-------------------------------------
1996 1997 1998
---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (804,411) $(496,338) $(1,833,804)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Deferred income taxes 425,662 (351,814) (73,848)
Depreciation and
amortization 2,037,472 6,721,854 5,558,520
Amortization of
discounts on
investments (162,296) (205,082) (26,953)
Amortization of
unearned operating
lease revenue from
sublease transactions (19,928) - -
Amortization of prepaid
operating lease expense
from sublease transactions 25,067 - -
Changes in operating assets
and liabilities:
Accounts receivable (2,153,219) 1,121,534 (1,493,779)
Other assets 279,659 (396,901) (1,556,671)
Accounts payable 642,602 245,270 (365,065)
Accrued expenses (105,576) 194,928 275,295
---------- ----------- -----------
Net cash provided by operating
activities 165,032 6,833,451 483,695
---------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Accounts payable - leases 18,107,528 (17,525,950) (608,568)
Purchase of equipment
for direct finance
leases and sales-type
leases (21,773,460) (38,158,975) (11,787,818)
Termination of direct
finance leases 1,591,822 4,499,046 3,159,587
Proceeds applied to
direct finance leases
and sales-type leases 5,685,159 12,327,521 18,159,432
Purchase of equipment
for operating leases (31,913,845) (346,733) (8,178,032)
Termination of operating
leases 12,749,549 6,972,505 481,980
Residual value sharing
arrangements - 4,628,698 856,969
Payments for acquisitions,
net of cash acquired - - (1,010,172)
Purchases of investments (19,495,594) (14,187,250) (3,697,782)
Proceeds from sale/maturity
of investments 16,494,049 14,031,717 6,636,003
---------- ----------- -----------
Net cash (used in) provided
by investing activities (18,554,792) (27,759,421) 4,011,599
---------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of
common stock 8,407,079 - 6,500
Repurchase of common stock - (29,365) (21,240)
Proceeds from notes payable - 3,894,286 5,183,606
Repayment of notes payable (1,593,313) (1,256,305) (3,526,782)
Increase in non-recourse
lease financing 31,559,769 38,818,439 19,139,928
Termination of non-recourse
lease financing (9,978,194) (3,463,973) (2,864,077)
Repayments and interest
amortization applied to
non-recourse lease
financing (7,458,283) (18,528,237) (23,127,796)
---------- ----------- -----------
Net cash provided by (used in)
financing activities 20,937,058 19,434,845 (5,209,861)
---------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 2,547,298 (1,491,125) (714,567)
CASH AND CASH EQUIVALENTS,
beginning of period 1,153,476 3,700,774 2,209,649
---------- ----------- ----------
CASH AND CASH EQUIVALENTS,
end of period $3,700,774 $2,209,649 $1,495,082
========== ========== ==========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for income taxes $ 24,437 $ 48,574 $ 87,232
========== ========== ==========
Cash paid for interest $1,358,538 $2,936,823 $2,714,790
========== ========== ==========
DETAILS OF ACQUISITIONS:
Fair value of assets acquired $ - $ - $2,365,376
Liabilities assumed - - (2,570,194)
Notes issued - - (262,500)
Purchase price in excess
of net assets acquired - 1,477,490
---------- --------- -----------
Cash paid for acquisitions $ - $ - $ 1,010,172
========== ========= ===========
The accompanying notes are an integral part of these consolidated
statements.
F-6
<PAGE>
PARAMOUNT FINANCIAL CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. COMPANY BACKGROUND:
------------------
Paramount Financial Corporation ("Paramount" or the "Company")
was incorporated in the state of Delaware in July 1991.
Paramount is a comprehensive business solutions provider,
offering customers a wide range of integrated services including
lease finance, network design and implementation. The Company is
not tied to any one manufacturer and thus can provide customers
with available technical and financial alternatives regardless of
the specific hardware platform. Paramount's customer base is
mostly comprised of large, domestic, creditworthy customers in a
variety of industries. Prior to 1996, the Company generated most
of its revenue from wholesale trading of new and used equipment.
However, in 1996, the Company aggressively expanded its leasing
operations, which now accounts for most of its revenue. In July
1996, Paramount formed a new wholly owned subsidiary, Paratech
Resources Inc. ("Paratech"), which offers comprehensive
information technology solutions, including network design and
integration, software applications, training and value added
support services. In January 1998, the Company acquired
Deltaforce Personnel Services, Inc. ("Deltaforce"), which offers
temporary and permanent legal support staff.
On January 22, 1996 ("Effective Date"), the Company consummated
an initial public offering of its securities. In connection with
the offering, the Company issued a total of 1,495,000 units
inclusive of the underwriter's over-allotment option which was
exercised in full, at a price of $7.00 per unit. Each unit sold
in the offering consisted of two shares of common stock and two
redeemable class A warrants. The common stock and class A
warrants were detachable and trade separately. The class A
warrants are exercisable commencing one year from the Effective
Date. Each class A warrant entitles the holder to purchase one
share of common stock at $16.00 per share (after giving effect to
a one-for-four reverse stock split of the common stock effected
May 19, 1998 (see Note 9) and subject to adjustment for anti-
dilution) during the four year period commencing one year from
the Effective Date. The class A warrants are redeemable by the
Company for $0.05 per warrant, in the event that the closing bid
price of the Company's common stock exceeds $36.00 per share
(after giving effect to the one-for-four reverse stock split) for
twenty consecutive trading days ending within ten days of the
notice of redemption. With the prior written consent of the
underwriter, upon thirty days written notice to all holders of
the class A warrants, the Company shall have the right to reduce
the exercise price and/or extend the term of the class A
warrants. None of the class A warrants issued in connection with
the initial public offering have been exercised to date. Net
proceeds of the offering totaled approximately $8,400,000, after
deducting underwriting discount and commissions, underwriter's
non-accountable expense allowance and other offering expenses.
In connection with the offering, 300,000 shares of common stock
owned by the Company's two original shareholders (the "Selling
Securityholders") were also offered and sold to the public.
Additionally, there was a secondary offering of securities by
certain non-affiliated lenders of the Company (the "Selling
Lenders"). The Selling Lenders registered 750,000 units,
identical to the initial public offering units described above,
as well as an additional 1,500,000 shares of common stock
issuable upon the exercise of class B warrants (Note 8). The
class B warrants are identical to class A warrants, except that
their exercise price is $16.80 per share (after giving effect to
F-7
<PAGE>
the one-for-four reverse stock split), they are not included for
listing on any public trading market and there is no solicitation
fee payable in connection with their exercise. None of the
aforementioned class A or class B warrants have been exercised to
date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements as of and for the years
ended December 31, 1996 and 1997 includes the accounts of the
Company and its wholly owned subsidiary, Paratech Resources Inc.
The consolidated financial statements as of and for the year
ended December 31, 1998 includes the accounts of the Company and
its wholly owned subsidiaries, Paratech Resources Inc. and
Deltaforce Personnel Services, Inc. All intercompany balances
and transaction have been eliminated in consolidation.
Cash Equivalents
----------------
The Company considers all highly liquid debt and equity
instruments with an original maturity of three months or less to
be cash equivalents. Cash equivalents include investments in
money market funds and are stated at cost, which approximates
market value.
Investments Available for Sale
------------------------------
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity
Securities" addresses the accounting and reporting for
investments in debt and equity securities. Securities classified
as available for sale are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a
separate component of stockholders' equity (on an after tax
basis). Gains and losses on the disposition of securities are
recognized on the specific identification method in the period in
which they occur.
At December 31, 1997 and 1998, investments available for sale
consist of United States government and agency bonds with
original maturities of one year or less and a mutual fund. The
cost of debt securities is adjusted for accretion of discount to
maturity and recorded as interest income and interest income is
recorded on the mutual fund as earned. At December 31, 1997 and
1998, the cost basis of these securities approximates market
value.
Net Investment in Direct Finance and Sales-Type Leases
------------------------------------------------------
The net investment in direct finance and sales-type leased assets
consists of the present value of the future minimum lease
payments plus the present value of the residual value, if any
(collectively referred to as the "net investment"). The residual
value is the estimated fair market value of the leased assets at
lease expiration.
Completed lease contracts which qualify as direct finance and
sales-type leases, as defined by Statement of Financial
Accounting Standards No. 13, ("SFAS 13") "Accounting for Leases",
are accounted for on the balance sheet by recording the total
minimum lease payments receivable, the estimated residual value
F-8
<PAGE>
of the leased equipment and the unearned income. The unearned
lease income represents the excess of the total minimum lease
payments and the estimated residual value expected to be
realized, over the cost of the related equipment. The unearned
income is recognized as revenue over the term of each lease by
applying a constant periodic rate of return to the declining net
investment in each lease.
Lease revenue includes that portion of unearned income amortized
into income during the current period. Revenue recognized at the
inception of a sales-type lease is recorded in sales.
Assets Held Under Operating Leases
----------------------------------
Assets held under operating leases consist of the equipment at
cost, net of accumulated depreciation. Depreciation is
recognized on a straight-line basis over the lease term up to the
Company's estimate of the equipment's residual value at lease
expiration. Accumulated depreciation was approximately
$5,148,000 and $4,453,000 at December 31, 1997 and 1998,
respectively.
Lease revenue includes the contractual lease payments and is
recognized on a straight-line basis over the lease term.
Residual Values
---------------
The Company's residual value estimates are based on current
market conditions and published residual value projections, as
determined at lease inception. On an ongoing basis, the Company
compares its residual value estimates against currently published
independent forecasts of equipment values at lease expiration as
well as other known market conditions. If the residual value is
determined to be excessive and the decline in residual value is
judged to be other than temporary, the Company revises its
residual values accordingly with corresponding adjustments to
income and unearned income. During the years ended December 31,
1997 and 1998, the Company entered into residual value sharing
agreements whereby an equipment investor or a financial
institution purchased a portion of the residual value of the
equipment on lease in exchange for the right to share in re-
marketing proceeds received upon lease expiration. The proceeds
received were used to reduce the cost basis and the residual
value in the leased assets.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Revenue Recognition
-------------------
The Company records revenues when products are shipped and title
transfers to the customers or services are provided to customers.
When equipment is sold to another computer leasing and trading
company (a "broker"), the transfer of title and recognition of
revenue generally occur upon the receipt of payment from the
broker.
F-9
<PAGE>
From time to time, the Company will receive payment prior to the
transfer of title or purchase of the related inventory. The
Company records such amounts as unearned sales revenue on the
balance sheet. Upon shipment and transfer of title, unearned
sales revenue is reversed and recorded as equipment sales.
The Company records revenue from the sale of leased equipment to
an equipment investor upon transfer of title to the equipment.
Subsequent to a sale of this variety, the Company generally is a
party to a re-marketing agreement under which it may earn
additional income from the asset's future re-lease or sale value
upon lease termination or expiration.
See Net Investment in Direct Finance and Sales-Type Leases and
Assets Held Under Operating Leases for a discussion of revenues
earned under leasing transactions.
Sublease Transactions
---------------------
From time to time, the Company enters into certain transactions
in which it acts as both lessee and sublessor of equipment.
Since both the lease and sublease are operating leases, no
related assets or liabilities are recorded on the Company's
balance sheet, other than transactions that are prepaid.
Lease Expense
-------------
Lease expense includes depreciation on assets held under
operating leases, interest expense on obligations for financed
equipment and sublease rental expense. The cost of equipment
recognized at the inception of a sales-type lease is reflected in
cost of sales.
Income Taxes
------------
At its inception, the Company elected status as an S corporation
and, therefore, through December 31, 1995 was not subject to
federal income tax as a separate entity. Instead, the
shareholders were taxed on the Company's income, whether or not
distributed, and they were entitled to deduct Company losses, if
any, to the extent of the tax basis each shareholder had in the
Company's common stock. The Company had been subject to certain
corporate taxes on the state level. In connection with its
initial public offering described above, the Company terminated
its S election and is currently taxable as a C corporation. The
adjustment to record deferred income taxes upon termination of
the Company's S election was to record a net deferred income tax
liability of approximately $430,000 in 1996.
Deferred income taxes are provided for temporary differences
between the carrying values of assets and liabilities for
financial reporting and tax purposes at the enacted rate at which
these differences are expected to reverse in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
Net Loss Per Common Share
-------------------------
Effective December 31, 1997, the Company adopted the disclosure-
only Statement of Financial Accounting Standards No. 128 ("SFAS
128") "Earnings per Share". In accordance with SFAS 128, basic
loss per common share is computed by dividing net loss by the
F-10
<PAGE>
weighted average number of common shares outstanding. Common
stock equivalents are excluded from the computation as they would
have an anti-dilutive effect.
Stock-Based Compensation
------------------------
In 1996, the Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", by continuing to apply
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," while providing
the required pro forma disclosures as if the fair value method
had been applied (Note 10).
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with
the current year presentation.
3. ACQUISITIONS
------------
Deltaforce Personnel Services, Inc.
-----------------------------------
On January 9, 1998, the Company acquired 100% of the outstanding
shares of Deltaforce Personnel Services, Inc. ("Deltaforce"), a
privately held New York City-based staffing company, for
approximately $560,000, which included $162,500 of notes payable.
The acquisition agreement provides for additional consideration
of $162,500 to be paid if the acquired entity's results of
operations exceed certain targeted levels. This additional
consideration will be recorded when earned as additional purchase
price. The acquisition was accounted for as a purchase and
accordingly the operating results of Deltaforce have been
included in the Company's consolidated financial statements since
the date of the acquisition. The excess of the aggregate
purchase price over the net assets acquired of approximately
$463,500 is being amortized over 15 years.
RBW Staffing Resources, Inc.
----------------------------
On July 28, 1998, Deltaforce, a wholly owned subsidiary of the
Company, acquired certain assets from RBW Staffing Resources,
Inc. (d/b/a WordSmiths) ("WordSmiths"), a privately held New York
City based staffing company, for approximately $440,000, which
included $100,000 of notes payable. The acquisition was
accounted for as a purchase and accordingly the operating results
of WordSmiths have been included in the Company's consolidated
financial statements since the date of the acquisition. The
excess of the aggregate purchase price over the net assets
acquired, of approximately $440,000, is being amortized over 15
years. In connection with this acquisition, Deltaforce entered
into non-compete agreements with two key executives of WordSmiths
for an aggregate consideration of $460,000, $60,000 of which was
paid at closing with $150,000 due on July 28, 1999 and $250,000
due on July 28, 2000. Such non-compete agreements are included
in other assets and are being amortized over the term of the
agreement of 5 years. In addition, simultaneous with the closing
of the transaction, the Company entered into an employment
agreement with the former shareholder of WordSmiths (the
"Shareholder"). Under the terms of this agreement, the Company
sold 162,500 shares of newly issued $.04 par value common stock
to the Shareholder as follows: (1) 81,250 shares at $4.00 per
share, and (2) 81,250 shares at $6.00 per share. The Shareholder
F-11
<PAGE>
paid for the stock with cash equal to the par value of the shares
issued ($6,500) and by the issuance of two non-recourse secured
promissory notes and stock pledge agreements restricting the
issuance of the stock until the notes are paid in full. The
notes mature on July 27, 2000 and July 27, 2001, respectively
(Note 7). The operations of WordSmiths were merged into
Deltaforce to create The DeltaGroup.
Abbey, Garrett and Seth, Ltd.
-----------------------------
On October 23, 1998, Paratech Resources, Inc., a wholly owned
subsidiary of the Company, acquired 100% of the outstanding
shares of Abbey, Garrett and Seth, Ltd. (d/b/a: Comptech
Resources) ("Comptech"), a privately held systems consulting,
software applications and Internet commerce development firm, for
approximately $272,000. The acquisition was accounted for as a
purchase and accordingly the operating results of Comptech have
been included in the Company's consolidated financial statements
since the date of the acquisition. The excess of the aggregate
purchase price over the net assets acquired of approximately
$574,000 is being amortized over 10 years. In connection with
this acquisition, the Company entered into non-compete agreements
with three key executives for an aggregate consideration of
$380,000, $105,000 of which was paid at closing with $25,000 due
quarterly through October 23, 2001.
4. DIRECT FINANCE AND SALES-TYPE LEASES:
------------------------------------
The net investment in direct finance and sales-type leases at
December 31, 1997 and 1998 was comprised of the following:
1997 1998
---- ----
Total minimum lease payments
receivable $39,434,601 $30,895,900
Estimated residual value of
equipment 3,777,595 1,727,787
---------- ----------
43,212,196 32,623,687
Less: unearned income 3,270,432 2,564,309
---------- ----------
Net investment in direct finance
and sales-type leases $39,941,764 $30,059,378
=========== ===========
5. FUTURE MINIMUM LEASE PAYMENTS:
-----------------------------
Future minimum lease rentals to be received by the Company under
non-cancelable direct finance, sales-type and operating leases
expiring through 2003 are as follows:
Years Ending Direct Finance and Operating
December 31, Sales-Type Leases Leases
------------ ----------------- ----------
1999 $24,351,494 $4,247,253
2000 12,736,497 1,123,815
2001 4,942,645 447,032
2002 857,975 -
2003 451,393 -
F-12
<PAGE>
6. OBLIGATIONS FOR FINANCED EQUIPMENT - NON-RECOURSE:
-------------------------------------------------
Under various arrangements with banks and financial institutions,
the Company finances substantially all of its equipment leases
with non-recourse notes. These notes provide for an assignment
of future lease rentals to these institutions at fixed interest
rates (which range between 6.0% and 10.8%). In exchange for
these future rentals, the Company receives a discounted cash
payment. In the event of default by a lessee, the financial
institution has a first lien on the underlying equipment, with no
further recourse against the Company. The underlying equipment
securing these non-recourse notes represents the Company's assets
under direct finance, sales-type and operating leases, which book
value totalled approximately $45.3 million and $37.3 million at
December 31, 1997 and 1998, respectively.
Future maturities through 2003 on the non-recourse notes
described above are as follows:
Years Ending December 31, Lease Payments
------------------------- --------------
1999 $19,631,397
2000 9,632,886
2001 5,034,509
2002 866,600
2003 452,918
-----------
35,618,310
Less: Interest 2,182,851
$33,435,459
===========
7. NOTES PAYABLE AND OTHER FINANCING:
---------------------------------
Notes payable were comprised of the following at December 31,
1997 and 1998:
1997 1998
---- ----
Notes payable to financial
institutions (a) $2,324,611 $1,601,990
Credit facilities (b) 331,754 1,773,699
Notes payable related to
acquisitions (c) - 937,500
---------- ----------
$2,656,365 $4,313,189
========== ==========
(a) During 1997 and 1998, the Company entered into a total of
nine notes payable agreements totalling approximately
$2,925,000 with a financial institution to finance the
residual value of certain equipment on lease, at an interest
rate of prime (8.50% at December 31, 1998) plus 0.25%.
Interest is payable quarterly and the principal amount is
due 60 days after lease expiration. These notes mature
through the year 2001. The equipment on lease and the
related lease serve as collateral for the notes payable.
F-13
<PAGE>
Also in 1997, the Company entered into a similar arrangement
with the same institution for $238,056 of residual value
financing bearing interest at prime (8.50% at December 31,
1998) plus 0.50% payable semi-annually. The entire
principal amount is due 60 days after lease expiration
(November 30, 1999). The equipment on lease and the related
lease serve as collateral for this note payable.
The Company entered into similar notes payable in the amount
of $1,254,000 and $18,036 with the same institution in early
1997 and 1998, and repaid the loans in the same year.
(b) In December 1997, the Company entered into a loan agreement
with a bank for a $2,000,000 credit facility, which expires
on December 30, 1998, to finance the purchase of equipment
on leases that are approved by the bank. The bank will
issue notes equal to the discounted rental payments under
the leases being financed using the bank's current interest
rate. The notes are payable monthly as the lease payments
become due. As collateral for the notes, the bank has a
first priority security interest in the equipment and the
underlying lease. Under the agreement the Company is
required to maintain certain financial ratios. As of
December 31, 1998, the Company was not in compliance with
the debt covenant requiring tangible net worth of at least
$6.7 million. As of December 31, 1998, the Company had
$106,000 outstanding at a rate of 8.08%. Annual maturities
are $87,000 and $19,000 in 1999 and 2000, respectively.
The Company maintains a $2,000,000 revolving line of credit
agreement with a finance company, for it's subsidiary
Paratech, secured by accounts receivable of Paratech.
Interest on outstanding borrowings accrues at the prime rate
(8.50% at December 31, 1998) plus 1 1/2%. Borrowings are
limited to 85% of eligible accounts receivable. This
facility allows the Company to purchase computer hardware
from its vendors with net 30-day terms interest free. At
the expiration of the net 30-day period, the Company has the
option of paying the amount due or, provided the Company has
sufficient eligible collateral, borrowing under the credit
facility. As of December 31, 1998, Paratech had $464,000
outstanding under this line, of which $194,000 was
classified as debt.
In addition, in connection with the acquisition of Comptech,
the Company assumed all outstanding obligations under a
similar arrangement between Comptech and the same finance
company. As of December 31, 1998, approximately $440,000
remained outstanding under this facility. This facility
must be repaid in full by July 23, 1999.
In April 1998, the Company entered into a $500,000 term loan
with a bank collateralized by $600,000 in cash maintained in
an investment account. Interest accrues at a rate of 8.03%
and principal payments of approximately $41,600 and interest
are due on a quarterly basis through April 20, 2001. As of
December 31, 1998, approximately $417,000 remains
outstanding under this agreement.
In January 1998, the Company entered into a $750,000
revolving line of credit agreement with a bank secured by
accounts receivable which expires on June 30, 1999.
Interest on outstanding borrowings accrues at the bank's
prime rate (8.50% at December 31, 1998) plus 1%, and
interest is paid monthly. Borrowings are limited to 80% of
eligible accounts receivable. As of December 31, 1998,
$600,000 was outstanding under this line.
F-14
<PAGE>
(c) In connection with the acquisitions described in Note 3, the
Company entered into promissory notes with several
individuals. Interest on such notes ranges from 0% to
8.50%. The interest components of those non-interest
bearing notes are immaterial. Annual maturities are
$512,500, $350,000 and $75,000 in 1999, 2000 and 2001,
respectively.
Additional Financing
--------------------
During 1997, the Company entered into several residual value
sharing agreements whereby a financial institution agreed to
purchase a portion of the residual values of the equipment on
lease for approximately $4,629,000 in exchange for the right to
share in re-marketing proceeds received upon lease expiration.
The proceeds received were used to reduce the Company's cost
basis and residual value in the leased assets.
Secured Bridge Line
-------------------
This facility has been arranged with three banks in the total
amount of $1,250,000, for the purpose of financing the cost of
equipment purchased for sale or lease, on a short-term basis,
generally payable in 30 to 90 days. The lending banks are given
a first security interest in both the equipment and the contract
for sale or lease. The above secured line also includes a
$100,000 unsecured working capital line. The interest rate
charged for these borrowings is a floating 1% over the banks'
prime lending rate, 8.5% and 9% at December 31, 1997 and 1998,
respectively. As of December 31, 1997 and 1998, no amounts were
outstanding under these facilities. Both lines expired on June
30, 1998.
8. INCOME TAXES:
------------
The provision for (benefit from) income taxes is comprised of the
following:
Years Ended December 31,
-----------------------------
1996 1997 1998
---- ---- ----
Current:
Federal $ - $ - $ -
State 72,550 63,703 43,328
------- -------- --------
72,550 63,703 43,328
------- -------- --------
Deferred:
Federal (82,583) (251,928) (532,055)
State (12,145) (99,886) (82,362)
------- -------- --------
(94,728) (351,814) (614,417)
------- -------- --------
Valuation allowance 90,000 - 561,803
------- -------- --------
Termination of Subchapter
"S" election 430,390 - -
------- -------- --------
$498,212 $(288,111) $ (9,286)
Total ======= ======== =======
F-15
<PAGE>
Significant components of deferred income tax assets and
(liabilities) are as follows:
1997 1998
---- ----
Depreciation $263,757 $655,323
Lease transactions treated
differently for tax and
financial reporting purposes (803,095) (726,226)
Net operating loss carryforward 471,698 600,320
Other 83,792 122,386
Valuation allowance (90,000) (651,803)
------- --------
Net deferred income tax
(liability) $ (73,848) $ -
========= ========
The following reconciliation presents the principal reasons for
the difference between income taxes calculated at the United
States federal statutory income tax rate (34%) and the provision
for (benefit from) income taxes:
Years Ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
Federal income tax benefit
at U.S. statutory rate $(104,108) $(266,713) $(626,651)
Subchapter "C" impact of
SFAS 109 430,390 - -
Change in valuation
allowance 90,000 - 561,803
State taxes, net of federal
benefit 36,583 39,547 43,328
All other, net 45,347 (60,945) 12,234
-------- --------- -------
Provision for (benefit
from) income taxes $498,212 $(288,111) $ (9,286)
======== ========= =======
The Company has net operating loss carryforwards for income tax
reporting purposes of approximately $1,539,000 expiring through
2013. A full valuation allowance has been provided against the
net deferred tax asset due to the uncertainty at December 31,
1998 as to their future realization.
9. SHAREHOLDERS' EQUITY:
--------------------
In connection with the recapitalization of the Company in
contemplation of its initial public offering, in August 1995, the
Company's Board of Directors approved a stock split of
approximately 33,018.86792-to-one, in the form of a stock
dividend to the Company's common shareholders. Par value changed
to $0.01 per share from $1.00 per share. The stock dividend
resulted in the issuance of 3,499,894 additional shares of common
stock, for a total of 3,500,000 shares outstanding subsequent to
the split. This action required an amendment to the Company's
Articles of Incorporation, which increased the number of
authorized shares of common stock from 1,000 to 35,000,000 and
F-16
<PAGE>
authorized 5,000,000 shares of preferred stock. Effective May
19, 1998, the Board of Directors approved a reduction of the
authorized number of shares of common stock from 35,000,000 to
17,500,000 and authorized a one-for-four reverse stock split of
the Company's common stock. The par value of the common stock
was increased from $0.01 to $0.04 per share. The preferred stock
remained unchanged. All shareholders' equity accounts and per
share data have been retroactively adjusted to reflect this
reverse split.
See Note 1 for a description of the Company's initial public
offering of its securities.
During the year ended December 31, 1997, the Board of Directors
of the Company approved a plan that would allow for the
repurchase of up to $500,000 worth of common stock of the
Company. The repurchase program took effect immediately and is
authorized to continue for a period of two years. Subject to
applicable rules, the plan allows the Company to repurchase
shares at any time during the authorized period in any increments
it deems appropriate. As of December 31, 1997 and 1998, the
Company had repurchased 12,500 and 24,500 shares for a cash
purchase price of $29,365 and $21,240, respectively.
10. STOCK OPTION PLANS:
------------------
Employee Stock Option Plan
--------------------------
On August 28, 1995, the Board of Directors adopted and the
Company's shareholders approved the Employee Stock Option Plan
(the "Stock Option Plan") for all senior executive officers, key
employees and consultants of the Company pursuant to which
187,500 shares of common stock were reserved for issuance. In
June 1997, the Board of Directors approved an amendment to
increase the aggregate number of shares of common stock reserved
for issuance by 187,500 shares, for a total of 375,000. Options
granted under the Stock Option Plan may be either incentive stock
options ("ISO's"), which are intended to meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options ("NSO's"). Under the Stock Option
Plan, the Board of Directors may grant (i) ISO's at an exercise
price per share which is not less than the fair market value of a
share of common stock on the date on which such ISO's are granted
(and not less than 110% of the fair market value in the case of
any optionee who beneficially owns more than 10% of the total
combined voting power of the Company), and (ii) NSO's at an
exercise price per share which is determined by the Board of
Directors (and which may be less than the fair market value of a
share of common stock on the date on which such NSO's are
granted). The Stock Option Plan further provides that the
maximum period in which options may be exercised will be
determined by the Board of Directors, except that ISO's may not
be exercised after the expiration of ten years from the date the
ISO was initially granted (and five years in the case of any
optionee who beneficially owns more than 10% of the total
combined voting power of the Company). Any option granted under
the Stock Option Plan will be nontransferable and may be
exercised upon payment of the option price in cash, a cash
equivalent, common stock or any other form of consideration which
is acceptable to the Board of Directors.
Of the total options granted, 21,250 options in 1997 and 0
options in 1998 are exercisable after one year and the remaining
20,000 and 144,750 options are exercisable in whole or in part
20% per year from the date of grant, respectively. As of
December 31, 1998, none of the options were exercisable.
F-17
<PAGE>
The following table reflects activity under the Stock Option Plan
for the years ended December 31, 1997 and 1998 :
Weighted
Average
Exercise
Shares Exercise Price Price
------ ------- --------
Outstanding,
December 31, 1996 - - $ -
Granted 52,500 $0.59 - $2.38 1.81
Canceled (11,250) 0.59 - 1.76 1.11
-------
Outstanding,
December 31, 1997 41,250 1.50 - 2.38 2.00
-------
Granted 150,000 0.44 - 2.50 1.02
Canceled (5,250) 0.44 - 1.50 .99
-------
Outstanding, 186,000 $0.44 - $2.38 $1.24
December 31, 1998 =======
The 186,000 options outstanding as of December 31, 1998 have a
weighted average remaining contractual life of 9.25 years.
The Company accounts for these plans under APB Opinion No. 25,
under which no compensation has been recorded. Had compensation
cost for the plan been determined in accordance with SFAS 123,
the Company's net loss and basic loss per common share would have
been decreased to the following pro forma amounts:
1997 1998
---- ----
Net Loss As Reported $496,338 $1,833,804
Pro Forma 518,148 1,849,110
Basic loss per As Reported $.25 $.89
common share Pro Forma $.26 $.89
The fair value of each stock option grant is estimated as of the
date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
1997 1998
---- ----
Fair value $0.25 $0.59
Expected life (years) 3.45 3.87
Risk-free interest rate 6.5% 4.8%
Volatility 71% 73%
Dividend yield 0% 0%
The pro forma effects of applying SFAS 123 are not indicative of
future amounts because stock option awards are anticipated in
future years.
F-18
<PAGE>
Director Option Plan
--------------------
On October 1, 1995, the Board of Directors of the Company
adopted, and the Company's shareholders approved, the Director
Option Plan (the "Director Plan") pursuant to which 12,500 shares
of common stock of the Company were reserved for issuance upon
the exercise of options granted to non-employee directors of the
Company. Under the Director Plan, an eligible director of the
Company will, after having served as a director for one year,
automatically receive non-qualified stock options to purchase 500
shares of common stock per annum at an exercise price equal to
the fair market value of such shares at the time of grant of such
options. Each option is immediately exercisable for a period of
ten years from the date of grant but generally may not be
exercised more than 90 days after the date an optionee ceases to
serve as a director of the Company. The Company has adopted SFAS
123 to account for stock-based compensation awards granted to
non-employee directors, under which a compensation cost is
recognized for the fair value of the options granted as of the
date of grant. As of December 31, 1998, there were no options
granted to directors under the Director Plan.
11. EMPLOYEE SAVINGS PLAN
---------------------
The Company has an employee savings plan which covers all
employees who have completed at least one year of service with
the Company and permits participants to make contributions by
salary reduction pursuant to section 401(k) of the Internal
Revenue Code. Company contributions are discretionary. As of
December 31, 1997 and 1998, the Company did not make any
contributions to the plan.
12. SEGMENT INFORMATION
-------------------
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information". Reportable operating segments are determined based
upon the Company's management approach. The management approach,
as defined by SFAS No. 131, is based on the way that the chief
operating decision maker organizes the segments within an
enterprise for making operating decisions and assessing
performance. While the Company's results of operations are
primarily reviewed on a consolidated basis, the chief operating
decision maker also manages the enterprise in three segments: (i)
high technology equipment leasing ("Paramount"), (ii) business
integration ("Paratech"), and (iii) legal support staff
("DeltaGroup"). The following represents selected financial
information for the Company's segments for the years ended
December 31, 1996, 1997 and 1998:
F-19
<PAGE>
Paramount Paratech DeltaGroup Total
--------- -------- ---------- -----
1996
----
Revenues $31,195,984 $156,532 $ - $31,352,516
Cost of sales 25,643,426 141,596 - 25,785,022
Net loss (783,271) (21,140) - (804,411)
Assets 51,181,503 380,017 - 51,561,520
1997
----
Revenues 28,620,168 3,774,673 - 32,394,841
Cost of Sales 16,871,078 3,062,135 19,933,213
Net income
(loss) 231,251 (727,589) - (496,338)
Assets 51,956,164 1,106,297 - 53,062,461
1998 Total
---- -----
Revenues 29,090,851 5,411,945 3,982,695 38,485,491
Cost of sales 20,536,854 4,453,016 3,167,396 28,157,266
Net loss (784,797) (545,290) (503,717) (1,833,804)
Assets 40,559,376 2,581,710 2,105,524 45,246,610
13. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT:
-------------------------------------------------
For the years ended December 31, 1996, 1997 and 1998, the
following customers represented in excess of 10% of total
revenues for the respective years:
Customer 1996 1997 1998
-------- ---- ---- ----
A 40% - -
B 25% - -
C - 47% -
D - 14% 51%
E - - 11%
The Company's net investment in direct finance and sales-type
leases is concentrated primarily with end users of the computer
equipment. The Company has various arrangements with banks and
financial institutions in which lease receivables are assigned to
the institutions in exchange for a discounted cash payment. This
financing is in the form of non-recourse notes, in which the
financial institution has a first lien on the underlying
equipment with no further recourse against the Company.
Therefore, the Company has no credit exposure from these assigned
leases.
14. COMMITMENTS:
-----------
Operating Leases
----------------
The Company leases two office facilities and office equipment
under operating leases expiring through November 2002. Total
rent expense amounted to approximately $45,000, $90,000 and
F-20
<PAGE>
$184,000 in 1996, 1997 and 1998, respectively. Total minimum
lease payments due under non-cancelable operating leases are as
follows:
1999 $202,480
2000 156,000
2001 156,000
2002 143,000
Employment Agreements
---------------------
In 1998, the Company has entered into employment agreements with
two executives expiring through the end of 1999 with aggregate
minimum payments totalling $655,000.
In connection with the acquisitions described in Note 3, the
Company has also entered into employment agreements, with five
executives through the end of 1999 with aggregate minimum
payments totaling $770,000.
15. SUBSEQUENT EVENT (UNAUDITED)
----------------------------
On March 3, 1999, Paratech acquired certain assets of Web
Business Systems, Inc., a privately held New York based web
hosting and development company, for a total purchase price of
$80,000. The acquisition will be accounted for as a purchase;
accordingly the purchase price will be allocated to the
underlying assets and liabilities based on their respective
estimated fair values at the date of acquisition.
F-21
STOCK PURCHASE AGREEMENT
Among
COMPTECH ACQUISITION CORPORATION,
ABBEY, GARRETT & SETH, LTD.
And
ALL OF THE SHAREHOLDERS OF
ABBEY, GARRETT & SETH, LTD.
_____________________________________
DATED AS OF OCTOBER 23, 1998
_____________________________________
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I PURCHASE AND SALE OF PURCHASED SHARES . . . . . . 2
SECTION 1.1 Purchased Shares . . . . . . . . . . . . . 2
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDERS . . . . . . . . 2
SECTION 2.1 Corporate Existence and Power;
Status of Purchased Shares . . . . . . . 2
SECTION 2.2 Charter Documents and Corporate Records . 3
SECTION 2.3 Financial Information . . . . . . . . . . 3
SECTION 2.4 Liabilities . . . . . . . . . . . . . . . 3
SECTION 2.5 Absence of Certain Changes . . . . . . . . 4
SECTION 2.6 Properties; Title . . . . . . . . . . . . 5
SECTION 2.7 Contracts . . . . . . . . . . . . . . . . 5
SECTION 2.8 Claims and Proceedings . . . . . . . . . . 6
SECTION 2.9 Taxes . . . . . . . . . . . . . . . . . . 7
SECTION 2.10 Employee Benefit Plans . . . . . . . . . . 8
SECTION 2.11 Compliance with Laws . . . . . . . . . . . 8
SECTION 2.12 Permits . . . . . . . . . . . . . . . . . 9
SECTION 2.13 Depositaries; Powers of Attorney, Etc. . . 9
SECTION 2.14 No Conflicts; Consents . . . . . . . . . . 9
SECTION 2.15 Authority Relative to This Agreement . . . 9
SECTION 2.16 Disclosure . . . . . . . . . . . . . . . . 10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
SHAREHOLDERS . . . . . . . . . . . . . . . . . 10
SECTION 3.1 Title to Purchased Shares . . . . . . . . 10
SECTION 3.2 Authority Relative to This Agreement . . . 10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER . 11
SECTION 4.1 Authority Relative to This Agreement . . . 11
SECTION 4.2 No Conflicts; Consents . . . . . . . . . . 11
SECTION 4.3 Corporate Existence and Power . . . . . . 12
ARTICLE V DOCUMENTS AND INSTRUMENTS BEING DELIVERED . . . . 12
SECTION 5.1 Documents Delivered by Purchaser . . . . . 12
SECTION 5.2 Documents Delivered by Shareholders . . . 13
SECTION 5.3 Documents Delivered by the Company . . . . 13
ARTICLE VI INDEMNIFICATION . . . . . . . . . . . . . . . 14
SECTION 6.1 Survival of Representations and
Warranties . . . . . . . . . . . . . . . 14
SECTION 6.2 Obligation of the Shareholders to
Indemnify; Special Indemnity of
Principal Shareholders . . . . . . . . . 14
SECTION 6.3 Obligation of Purchaser to Indemnify . . . 15
SECTION 6.4 Notice and Opportunity to Defend Third
Party Claims . . . . . . . . . . . . . . 15
SECTION 6.5 Payment of Indemnification Amount . . . . 16
ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . 16
SECTION 7.1 Notices . . . . . . . . . . . . . . . . . 16
SECTION 7.2 Entire Agreement . . . . . . . . . . . . . 17
SECTION 7.3 Waivers and Amendments; Non-Contractual
Remedies; Preservation of Remedies . . . 17
SECTION 7.4 Governing Law . . . . . . . . . . . . . . 17
SECTION 7.5 Arbitration . . . . . . . . . . . . . . . 17
SECTION 7.6 Binding Effect; No Assignment . . . . . . 17
SECTION 7.7 Exhibits . . . . . . . . . . . . . . . . . 18
SECTION 7.8 Severability . . . . . . . . . . . . . . . 18
SECTION 7.9 Counterparts . . . . . . . . . . . . . . . 18
SECTION 7.10 Expenses. . . . . . . . . . . . . . . . . 18
SECTION 7.11 Further Assurances . . . . . . . . . . . . 18
ARTICLE VIII DEFINITIONS . . . . . . . . . . . . . . . . . 18
SECTION 8.1 Definitions . . . . . . . . . . . . . . . 18
SECTION 8.2 Interpretation . . . . . . . . . . . . . . 23
<PAGE>
EXHIBITS
Exhibit A-1 - Form of Employment Agreement with Stuart
Belloff
Exhibit A-2 - Form of Employment Agreement with Neeraj Rajpal
Exhibit B - Form of Noncompetition Agreement with Alan
Krinsky
Exhibit C - General Release of Shareholders
<PAGE>
SCHEDULES
Schedule A - Shareholders and Purchased Shares;
Allocation of Purchase Price
Schedule 2.1 - Jurisdictions Company is Qualified to do
Business as a Foreign Corporation
Schedule 2.4 - Certain Liabilities
Schedule 2.5 - Absence of Certain Changes
Schedule 2.6A - Real Property Leases
Schedule 2.6B - Liens
Schedule 2.7 - Contracts
Schedule 2.8 - Claims and Proceedings
Schedule 2.9 - Taxes
Schedule 2.10 - Employee Benefit Plans; ERISA Matters
Schedule 2.11 - Orders; Laws
Schedule 2.12 - Permits; Environmental Permits
Schedule 2.13 - Depositories; Powers of Attorney
Schedule 2.14 - Required Consents
<PAGE>
AGREEMENT dated as of October 23, 1998 among COMPTECH
ACQUISITION CORPORATION, a New York corporation (the
"Purchaser"), ABBEY, GARRETT & SETH, LTD., a New York corporation
---------
(the "Company"), and all of the shareholders of the Company.
-------
R E C I T A L S
- - - - - - - -
1. The Company is in the business of systems integration
and maintenance and software applications sales, training,
development and consulting (which business as currently conducted
is referred to as the "Business"). The Company conducts the
--------
Business under the name "Comptech Resources" (the "Acquired
--------
Name").
----
2. The shareholders of the Company (individually referred
to as a "Shareholder" and collectively referred to as the
-----------
"Shareholders") own an aggregate of 200 shares of the common
------------
stock of the Company, no par value per share (the "Purchased
---------
Shares"), and the Purchased Shares represent all of the issued
------
and outstanding capital stock of the Company. The Shareholders
and the respective number of Purchased Shares owned by each
Shareholder is set forth on Schedule A hereto.
----------
3. The Shareholders desire to sell and transfer to the
Purchaser, and Purchaser desires to purchase and acquire from the
Shareholders, all of the Shareholders' right, title and interest
in and to the Purchased Shares.
4. In connection with the acquisition of the Purchased
Shares, Paratech Resources, Inc., a New York corporation and the
sole shareholder of the Purchaser ("Paratech"), will agree to
--------
engage each of Stuart Belloff ("Belloff") and Neeraj Rajpal as an
-------
employee and each of the foregoing will agree to serve as an
employee, of Paratech, all in accordance with the terms and
conditions set forth in employment agreements (the "Employment
----------
Agreements") in the form annexed hereto as Exhibit A-1 and
---------- -----------
Exhibit A-2, respectively, to be entered into concurrent with the
-----------
execution hereof.
5. In connection with the acquisition of the Purchased
Shares, Alan Krinsky ("Krinsky", and, collectively with Belloff,
-------
the "Principal Shareholders") will agree not to compete with
----------------------
Purchaser with respect to the "Restricted Business" (as therein
defined) for a period of three (3) years following the date
hereof and to not use the Acquired Name or any derivation thereof
at any time after the date hereof, pursuant to the terms and
conditions set forth in a noncompetition agreement (the
"Noncompetition Agreement") in the form annexed hereto as Exhibit
------------------------ -------
B to be entered into concurrent with the execution hereof.
-
6. In furtherance of the consummation of the acquisition
of the Purchased Assets and the other transactions contemplated
hereby (the "Contemplated Transactions"), the parties hereto
-------------------------
desire to enter into this Agreement (certain capitalized terms
used herein have the respective meanings set forth in Article
VIII).
NOW, THEREFORE, in consideration of the premises and for
other good and valuable consideration, the receipt and
sufficiency of which are hereby expressly acknowledged, the
parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF PURCHASED SHARES
SECTION 1.1 PURCHASED SHARES. In reliance upon the
----------------
representations, warranties, covenants and agreements of the
Shareholders and Principal Shareholders contained herein, on the
date hereof, the Shareholders are assigning, transferring,
selling, conveying and delivering to Purchaser, and Purchaser is
purchasing and acquiring from the Shareholders, free and clear of
all Liens, all of the Shareholders' right, title and interest in
and to the Purchased Shares for an aggregate purchase price of
$200,000 (the "Purchase Price"), the allocation of which is set
--------------
forth on Schedule A hereto and made a part hereof.
----------
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDERS
The Principal Shareholders, jointly and severally, represent
and warrant to Purchaser, as of the date of this Agreement, that:
SECTION 2.1 CORPORATE EXISTENCE AND POWER; STATUS OF
----------------------------------------
PURCHASED SHARES. (a) The Company is a corporation duly
----------------
organized, validly existing and in good standing under the laws
of the State of New York, and has all requisite powers and
authority to own, lease and operate its properties and to conduct
the Business as currently conducted. The Company is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property
owned or leased by it or the nature of its activities makes such
qualification necessary, which jurisdictions are listed on
Schedule 2.1, except for those jurisdictions where the failure to
------------
be so qualified would not, individually or in the aggregate, have
a material adverse effect on the Business, Assets, financial
condition or results of operations of the Company (collectively,
the "Condition of the Business").
-------------------------
(b) The Company does not have any Subsidiaries and
does not directly or indirectly own any interest or investment in
any other person.
(c) As of the date of this Agreement, the only issued
capital stock of the Company are the Purchased Shares. There are
no outstanding options, warrants, commitments, agreements or any
other rights of any character entitling any person other than
Purchaser to acquire any of the capital stock or other interest
in the Company.
SECTION 2.2 CHARTER DOCUMENTS AND CORPORATE RECORDS. (a)
---------------------------------------
The Company has heretofore delivered to Purchaser true and
complete copies of the Articles of Incorporation and by-laws, or
comparable instruments, of the Company as in effect on the date
hereof. The stock and transfer books of the Company have been
made available to Purchaser for its inspection and are true and
complete. The Company has heretofore permitted Purchaser to
inspect true and complete copies of the minutes of meetings (or
written consents in lieu of meetings) of the board of directors
(and all committees thereof) and shareholders of the Company.
All actions taken by the board of directors (and all committees
thereof) and shareholders of the Company are reflected in such
minutes, written consents and other documentation.
(b) To the knowledge of the Principal Shareholders,
all financial, business and accounting books, ledgers, accounts
and official and other records relating to the Company and the
Business have been properly and accurately kept and completed in
all material respects, and there are no material inaccuracies or
discrepancies contained or reflected therein.
SECTION 2.3 FINANCIAL INFORMATION. The Company has
---------------------
previously furnished to Purchaser true and complete copies of
(i) the Company's audited financial statements at and for the
year ended December 31, 1997 (the "December 1997 Statement"), and
-----------------------
(ii) the Company's unaudited financial statements at and for the
years ended December 31, 1996 and 1995 and for the calendar
quarter and six months ended June 30, 1998 (collectively, the
"Interim Statements"). To the knowledge of the Principal
------------------
Shareholders, the December 1997 Statement has been prepared in
accordance with GAAP consistently applied as set forth in the
notes thereto and was audited by the Company's accountants. To
the knowledge of the Principal Shareholders, each of the December
1997 Statement and the Interim Statements accurately presents the
financial position of the Company as of its date, and the
Company's earnings and cash flow for the periods then ended. To
the knowledge of the Principal Shareholders, the balance sheet
contained in the December 1997 Statement fully sets forth all
Assets and Liabilities of the Company existing as of its date
which, under GAAP, should be set forth therein, and the statement
of earnings contained therein sets forth the items of income and
expense of the Company which should appear therein under GAAP.
SECTION 2.4 LIABILITIES. Except as and to the extent set
-----------
forth on Schedule 2.4 reflected in the audited balance sheet of
------------
the Company (the "Latest Balance Sheet") in the December 1997
--------------------
Statement (the "Latest Balance Sheet Date"), the Company did not
-------------------------
have, as of the Latest Balance Sheet Date, any Liabilities or
obligations other than Liabilities or obligations entered into in
the ordinary course of the Business and consistent with past
practices; and except as set forth on Schedule 2.4 hereto, the
------------
Company has not incurred any Liabilities since the Latest Balance
Sheet Date, except (i) current Liabilities for trade or business
obligations incurred in connection with the purchase of goods or
services or otherwise in the ordinary course of the Business and
consistent with past practice, (ii) Liabilities in respect of
borrowings under the Company's IBM Credit Corporation line of
credit (the "IBMC Facility"), and (iii) liabilities under
-------------
Contracts entered into in the ordinary course of the Business.
SECTION 2.5 ABSENCE OF CERTAIN CHANGES. Since the Latest
--------------------------
Balance Sheet Date, except as set forth in this Agreement or in
Schedule 2.5, the Company has conducted the Business in the
------------
ordinary course consistent with past practices and there has not
been:
(a) Any material adverse change in the Condition of
the Business;
(b) Any transaction or Contract with respect to the
purchase, acquisition, lease, disposition or transfer of any
Assets or to any capital expenditure, in each case, other than in
the ordinary course of the Business in accordance with past
practice (either in a single or a series of related
transactions), or creation of any Lien on any Asset;
(c) Any declaration, setting aside or payment of any
dividend or other distribution with respect to any shares of
capital stock of the Company;
(d) Any damage, destruction or other casualty loss
(whether or not covered by insurance), condemnation or other
taking materially and adversely affecting the Assets of the
Company;
(e) Any change in any method of accounting or
accounting practice by the Company;
(f) Any material increase in the compensation payable
or to become payable to any officer, shareholder, director,
consultant, agent, sales representative or full-time employee of
the Company, or any alteration in the benefits payable to any
thereof other than pursuant to this Agreement or the transactions
or agreements contemplated hereby;
(g) Any material adverse change in the relationships
of the Company with its material suppliers, vendors or customers;
(h) Except for any changes made in the ordinary course
of the Business, any material change in any of the Company's
business policies, including advertising, marketing, pricing,
purchasing, personnel, returns or budget policies;
(i) Except in the ordinary course of the Business,
consistent with past practice, any payment, directly or
indirectly, of any Liability before it became due in accordance
with its terms; or
(j) Any material modification, termination, amendment
or other alteration or change in the terms or provisions of any
material Contract.
SECTION 2.6 PROPERTIES; TITLE. (a) The Company does not
-----------------
own, directly or indirectly, an interest in any real property.
Schedule 2.6A sets forth a complete list and general description
-------------
of all real property and buildings and structures leased by the
Company (the "Real Property Leases"). True and correct copies of
--------------------
the Real Property Leases have been delivered to the Purchaser.
The Real Property Leases are in full force and effect and neither
party to such lease is in default.
(b) The Company has good, valid, legal and beneficial
title to (or valid leasehold interest in) all of its Assets and
is the lawful owner of its Assets, free and clear of all Liens,
except those listed on Schedule 2.6B hereto. The machinery (if
-------------
any), equipment and other tangible personal property constituting
the Assets (whether owned or leased) are in working condition
(subject to normal wear and tear). Except as set forth on
Schedule 2.6.B, there are no outstanding options, warrants,
--------------
commitments, agreements or any other rights of any character,
entitling any person other than Purchaser to acquire any interest
in all, or any part of, the Assets, except for purchase orders in
the ordinary course of the Business entitling customers to
purchase items of Inventory in accordance with the terms thereof.
SECTION 2.7 CONTRACTS. Schedule 2.7 lists all Contracts,
--------- ------------
arrangements and agreements, written or oral, of the following
types to which the Company is a party or by which the Company,
the Business or any of the Assets is bound as of the date hereof:
(a) mortgages, indentures, guarantees, security
agreements, installment obligations and other agreements and
instruments relating to the borrowing of money or extension of
credit;
(b) employment, consulting and agency agreements and
collective bargaining agreements;
(c) sales agency, manufacturer's representative or
distributorship agreements;
(d) agreements, orders or commitments for the purchase
by the Company of raw materials, supplies or finished products
exceeding $10,000;
(e) agreements, orders or commitments for the sale by
the Company of Inventory or services of the Business or Assets
exceeding $10,000;
(f) licenses of patents, trademarks, copyrights and
other intangible property rights, other than "shrink wrap"
license and intellectual property rights passed through to end-
users from manufacturers or distributors;
(g) all capitalized leases and each lease of personal
property in excess of $10,000;
(h) joint venture agreements and shareholders'
agreements;
(i) agreements limiting the freedom of the Company or
its officers and employees to compete in any line of business
similar to the Business; and
(j) other agreements, contracts and commitments
material to the Business, or which in any case involve payments
or receipts of more than $10,000 or which may not be canceled on
no more than thirty (30) days' notice without penalty or premium.
The Contracts are valid, in full force and effect and
binding upon the Company, and, to the knowledge of the Principal
Shareholders, the other parties thereto in accordance with their
terms. The Company is not in material default (or alleged
material default) under any such Contract, nor, to the knowledge
of the Principal Shareholders, is any other party thereto in
material default thereunder, nor to the knowledge of the
Principal Shareholders does any condition exist that with notice
or the lapse of time or both would constitute a material default
(or give rise to a termination right) thereunder. To the
Principal Shareholders' knowledge, none of the other parties to
any such Contract intends to terminate or alter the provisions
thereof by reason of the Contemplated Transactions or otherwise.
Since the Latest Balance Sheet Date, except as set forth on
Schedule 2.7, the Company has not waived any right under any
------------
Contract, amended or extended any Contract or received notice of
termination with respect to any such Contract in each case which
would have a material adverse effect on the Condition of the
Business. The Company has not received written or oral notice of
cancellation or termination of any oral Contract. The Company
has heretofore delivered to Purchaser true, correct and complete
copies of all of the written Contracts and summaries of the
material provisions of all material oral Contracts.
SECTION 2.8 CLAIMS AND PROCEEDINGS. Except as set forth on
----------------------
Schedule 2.8, there are no outstanding Orders of any Governmental
------------
Body against or involving the Company, the Assets or the
Business. To the Principal Shareholders' knowledge, except as
set forth on Schedule 2.8, there are no actions, suits, claims or
------------
counterclaims or legal, administrative or arbitral proceedings or
investigations (collectively, "Claims") (whether or not the
------
defense thereof or Liabilities in respect thereof that are
covered by insurance), pending or, to the Principal Shareholders'
knowledge, threatened on the date hereof, against or involving
the Company, any of the Assets or the Business. Schedule 2.8
------------
also indicates those Claims the defense thereof or Liabilities in
respect thereof that are covered by insurance. Except as
provided in Schedule 2.8, there is no fact, event or circumstance
------------
known to the Principal Shareholders that would give rise to any
Claim that, if pending or threatened would, in the Principal
Shareholders' reasonable judgment, have an adverse effect on the
Condition of the Business. All notices required to have been
given to any insurance company listed as insuring against any
Claim set forth on Schedule 2.8 have been timely and duly given
------------
and, except as set forth on Schedule 2.8, no insurance company
------------
has asserted that such Claim is not covered by the applicable
policy relating to such Claim. There are no Claims pending or,
to the knowledge of the Principal Shareholders, threatened that
would give rise to any right of indemnification on the part of
any director, officer, employee or agent of the Company or the
heirs, executors or administrators of such director, officer,
employee or agent, against the Company.
SECTION 2.9 TAXES. (a) Except as set forth in Schedule
----- --------
2.9:
---
(i) the Company has timely filed all Tax Returns
required to be filed by it for all taxable periods ending on or
before the date hereof and all such Tax Returns are correct and
complete in all material respect;
(ii) the Company has paid when due to the
appropriate Tax Authority or has established, in accordance with
GAAP and consistent with past practice, accruals that are
reflected on the Latest Balance Sheet for the payment of, all
Taxes imposed on the Company or for which the Company is or could
be liable, whether to taxing authorities or to other persons
(pursuant to a tax sharing agreement or otherwise) for all
taxable periods ending before the date hereof;
(iii) no extension of time has been requested
or granted for the Company to file any Tax Return that has not
yet been filed or to pay any Tax that has not yet been paid;
(iv) there are no Tax Liens on or pending against
the Company or any of its properties;
(v) the Company has complied with all applicable
laws, rules and regulations relating to the withholding of Taxes
and has timely withheld all Taxes required to have been withheld
and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor or shareholder;
(vi) none of the Assets of the Company is property
that it is required to treat as being owned by any other person
pursuant to the "safe harbor lease" provisions of former Section
168(f)(8) of the Code;
(vii) none of the Assets of the Company
directly or indirectly secures any debt the interest on which is
tax-exempt under Section 103(a) of the Code; and
(viii) none of the Assets of the Company is
"tax-exempt use property" within the meaning of Section 168(h) of
the Code.
(b) Except for Taxes which may result from the
execution of this Agreement or the consummation of the
Contemplated Transactions, the Company has collected and remitted
to the appropriate Tax Authority all sales and use or similar
Taxes required to have been collected on or prior to the date
hereof, including any interest and any penalty, addition to tax
or additional amount unpaid, and have been furnished properly
completed exemption certificates for all exempt transactions.
The Company has collected and remitted if due to the appropriate
Tax Authority all withholding, payroll, employment, property,
customs duty, fee, assessment or charge of any kind whatsoever
(including but not limited to Taxes assessed to real property and
water and sewer rents relating thereto), including any interest
and any penalty, addition to tax or additional amount unpaid.
SECTION 2.10 EMPLOYEE BENEFIT PLANS. (a) To the knowledge
----------------------
of the Principal Shareholders, except as set forth on Schedule
--------
2.10, neither the Company nor any other member of the Controlled
----
Group (as defined herein) (x) has at any time maintained,
contributed to or participated in, (y) has or had at any time any
obligation to maintain, contribute to or participate in, or (z)
has any liability or contingent liability, direct or indirect,
with respect to any, employee benefit plan (within the meaning of
Section 3(3) of ERISA), oral or written retirement or deferred
compensation plan, incentive compensation plan, stock option
plan, consulting agreement, leased or temporary employee
agreement, unemployment compensation plan, vacation pay plan,
severance plan, bonus plan, stock compensation plan, cafeteria or
flexible spending account plan or any other type or form of
employee-related (or independent contractor-related) arrangement,
program, policy, plan or agreement covering any current or former
employee of the Company. For purposes of this Agreement, the
term "Controlled Group" shall refer to the Company and each other
----------------
corporation or other entity under common control with the Company
(pursuant to the provisions of Sections 414(b), (c), (m) or (o)
of the Code) at any time during the sixty (60) month period
ending on the date hereof.
(b) To the knowledge of the Principal Shareholders,
with respect to each plan, program, arrangement, agreement or
policy included, or required to be included, in Schedule 2.10
-------------
(the "Benefit Plans") (i) there has been no violation of any
-------------
applicable provision of ERISA; (ii) each Benefit Plan intended to
qualify under Section 401(a) of the Code or for any other tax-
exempt or tax-favored status under the Code so qualifies and has
received a favorable determination letter, opinion or
notification, as applicable, as to its qualification under the
Code, and no event has occurred that will or could be expected to
give rise to disqualification or loss of tax-exempt status of any
such plan or related trust; (iii) neither the Company nor any
other member of the Controlled Group is subject to any
outstanding or potential liability or obligation, direct or
indirect, relating to any such Benefit Plan; and (iv) there are
no actual or potential claims or actions (other than claims for
benefits in the normal course) relating to any such Benefit Plan.
SECTION 2.11 COMPLIANCE WITH LAWS. To the Principal
--------------------
Shareholders' knowledge, the Company is not in violation of any
order, judgment, injunction, award, citation, decree, consent
decree or writ (collectively, "Orders"), or any law, statute,
------
code, ordinance, rule, regulation or other requirement
(collectively, "Laws"), of any government or political
----
subdivision thereof, whether federal, state, local or foreign, or
any agency or instrumentality of any such government or political
subdivision, or any court or arbitrator (collectively,
"Governmental Bodies") affecting the Assets or the Business,
-------------------
except as disclosed on Schedule 2.11. The Company is not in
-------------
violation of any Environmental Laws.
SECTION 2.12 PERMITS. To the Principal Shareholders'
-------
knowledge, the Company has obtained all material licenses,
permits, certificates, certificates of occupancy, orders,
authorizations and approvals of (collectively, "Permits") and all
-------
Environmental Permits, and has made all material required
registrations and filings with, any Governmental Body that are
required for the conduct of the Business. To the Principal
Shareholders' knowledge, all material Permits and Environmental
Permits that are required for the conduct of the Business are
listed on Schedule 2.12 and are in full force and effect; no
-------------
violations, except as reflected on Schedule 2.12, are or have
-------------
been recorded in respect of any material Permit; and no
proceeding is pending or threatened to revoke or limit any
material Permit. Except as listed on Schedule 2.12, no material
-------------
Permit will terminate by reason of the Contemplated Transactions.
SECTION 2.13 DEPOSITARIES; POWERS OF ATTORNEY, ETC.
--------------------------------------
Schedule 2.13 sets forth (i) the name of each bank or similar
-------------
entity in which the Company has an account, lock box or safe
deposit box and the names of all persons authorized to draw
thereon or to have access thereto, and (ii) the name of each
person holding a general or special power of attorney from the
Company.
SECTION 2.14 NO CONFLICTS; CONSENTS. Except as set forth
----------------------
on Schedule 2.14 (the "Required Consents"), neither the
------------- -----------------
execution, delivery and performance by the Shareholders of this
Agreement and each other Transaction Document to which they are a
party, nor the consummation of the Contemplated Transactions (i)
violates any provision of the Certificate of Incorporation or
by-laws (or comparable instruments) of the Company; (ii) requires
the Company or any Shareholder to obtain any consent, approval,
Permit or action of or waiver from, or make any filing with, or
give any notice to, any Governmental Body (as defined herein) or
any other person (which consent, approval, Permit or waiver has
not been obtained); (iii) violates, conflicts with or results in
a breach or default under (after the giving of notice or the
passage of time or both), or permits the termination of, any
material Contract, right, other obligation or restriction
relating to or which materially adversely affects the Company,
the Business or the Assets to which the Company is a party or by
which the Company, the Business or Assets may be bound or
subject, or results in the creation of any Lien upon any of the
Assets pursuant to the terms of any such Contract; (iv) to the
Principal Shareholders' knowledge, violates any Law or Order (as
defined herein) of any Governmental Body against, or binding
upon, the Company, any Shareholder or upon the Assets or the
Business; or (v) violates or results in the revocation or
suspension of any material Permit.
SECTION 2.15 AUTHORITY RELATIVE TO THIS AGREEMENT. The
------------------------------------
Company has full power and authority to execute and deliver this
Agreement and each other Transaction Document to which it is a
party and to consummate the Contemplated Transactions. The
execution, delivery and performance by the Company of this
Agreement and the other Transaction Documents to which it is a
party, and the consummation by it of the Contemplated
Transactions, have been duly and validly authorized and approved
by the Company's board of directors and shareholders, and no
other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery by the Company
of this Agreement or the other Transaction Documents to which the
Company is a party or the consummation of the Contemplated
Transactions. This Agreement and the other Transaction Documents
to which the Company is a party have been duly and validly
executed and delivered by the Company, and (assuming the valid
execution and delivery thereof by the other parties thereto)
constitute the legal, valid and binding agreements of the
Company, enforceable against the Company, in accordance with
their respective terms, except as such obligations and their
enforceability may be limited by applicable bankruptcy and other
similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies
is subject to the discretion of the court before which any
proceeding therefor may be brought (whether at law or in equity).
SECTION 2.16 DISCLOSURE. Neither this Agreement, the
----------
Schedules hereto, nor any audited or unaudited financial
statements, documents or certificates furnished to Purchaser or
any of its representatives or Affiliates by or on behalf of the
Shareholders or the Company pursuant to this Agreement or in
connection with the Contemplated Transactions contains any untrue
statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements contained
herein or therein, in light of the circumstances under which they
were made, not misleading. All representations and warranties
made by the Principal Shareholders will be deemed to have been
relied on by Purchaser (notwithstanding any investigation by
Purchaser).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
Each Shareholder, in his or her own behalf and on a several
basis, represents to the Purchaser, as of the date of this
Agreement, that:
SECTION 3.1 TITLE TO PURCHASED SHARES. Each Shareholder
-------------------------
owns and holds good, valid, legal and beneficial title to those
Purchased Shares being sold by such Shareholder as set forth
opposite such Shareholder's name on Schedule A hereto, free and
----------
clear of any Lien of any kind.
SECTION 3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each
------------------------------------
Shareholder has full power, capacity and authority to execute and
deliver this Agreement on behalf of himself or herself and each
other Transaction Document to which he or she is a party and to
consummate the Contemplated Transactions. No other proceedings
on the part of the Shareholders (or any other person) are
necessary to authorize the execution and delivery by the
Shareholders of this Agreement or the other Transaction Documents
to which he or she is a party or the consummation of the
Contemplated Transactions. This Agreement and the other
Transaction Documents to which each Shareholder is a party have
been duly and validly executed and delivered by the Shareholders
and (assuming the valid execution and delivery thereof by the
other parties thereto) constitute the legal, valid and binding
agreements of the Shareholders, enforceable against the
Shareholders in accordance with their respective terms, except as
such obligations and their enforceability may be limited by
applicable bankruptcy and other similar Laws (as defined herein)
affecting the enforcement of creditors' rights generally and
except that the availability of equitable remedies is subject to
the discretion of the court before which any proceeding therefor
may be brought (whether at law or in equity).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to each of the
Shareholders, as of the date of this Agreement, that:
SECTION 4.1 AUTHORITY RELATIVE TO THIS AGREEMENT.
------------------------------------
Purchaser has full power and authority to execute and deliver
this Agreement and each other Transaction Document to which it is
a party and to consummate the Contemplated Transactions. The
execution, delivery and performance by Purchaser of this
Agreement and the other Transaction Documents to which it is a
party and the consummation by it of the Contemplated Transactions
have been duly and validly authorized and approved by Purchaser's
board of directors, and no other corporate proceedings on the
part of Purchaser are necessary to authorize the execution and
delivery by Purchaser of this Agreement or the other Transaction
Documents to which Purchaser is a party or the consummation of
the Contemplated Transactions to which Purchaser is a party.
This Agreement has been duly and validly executed and delivered
by Purchaser and (assuming the valid execution and delivery of
this Agreement by the other parties hereto) constitutes the
legal, valid and binding agreement of Purchaser, enforceable
against Purchaser in accordance with its terms, except as such
obligations and their enforceability may be limited by applicable
bankruptcy and other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of
equitable remedies is subject to the discretion of the court
before which any proceeding therefor may be brought (whether at
law or in equity).
SECTION 4.2 NO CONFLICTS; CONSENTS. Neither the execution,
----------------------
delivery and performance by Purchaser of this Agreement and each
other Transaction Document to which its is a party nor the
consummation of the Contemplated Transactions to which Purchaser
is a party (i) violates any provision of the Certificate of
Incorporation or by-laws of Purchaser; (ii) requires Purchaser to
obtain any consent, approval or action of or waiver from, or make
any filing with, or give any notice to, any Governmental Body or
any other person; (iii) violates, conflicts with or results in
the breach or default under (after the giving of notice or the
passage of time), or permits the termination of, any material
Contract to which Purchaser is a party or by which it or any of
its respective assets may be bound or subject; or (iv) violates
any Law or Order of any Governmental Body against, or binding
upon, Purchaser or upon its respective assets or businesses.
SECTION 4.3 CORPORATE EXISTENCE AND POWER. Purchaser is a
-----------------------------
corporation duly organized, validly existing and in good standing
under the laws of the State of New York and has all requisite
powers and all material Permits required to own, lease and
operate its properties and to conduct its business as currently
conducted. Purchaser is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction
where the character of the property owned or leased by Purchaser
or the nature of its activities makes such qualification
necessary, except for those jurisdictions where the failure to be
so qualified would not, individually or in the aggregate, have a
material adverse effect on the business, assets, financial
condition or the results of operations of Purchaser.
ARTICLE V
DOCUMENTS AND INSTRUMENTS BEING DELIVERED
SECTION 5.1 DOCUMENTS DELIVERED BY PURCHASER. On the date
--------------------------------
hereof, the Purchaser is delivering the following:
(a) Employment Agreements. The executed Employment
---------------------
Agreements.
(b) Purchase Price. The Purchase Price is being paid
--------------
by certified or bank check pro rata to each Shareholder.
(c) Closing Certificate. A certificate, dated the
-------------------
Closing Date, of the Secretary or Assistant Secretary of
Purchaser certifying that attached or appended to such
certificate (A) is a true and correct copy of its Articles of
Incorporation and all amendments if any thereto as of the date
hereof; (B) is a true and correct copy of its by-laws as of the
date thereof; (C) is a true copy of all corporate actions taken
by it, including resolutions of its board of directors
authorizing the consummation of the Contemplated Transactions and
the execution, delivery and performance of this Agreement and
each other Transaction Document to be delivered by Purchaser
pursuant hereto; and (D) are the names and signatures of its duly
elected or appointed officers who are authorized to execute and
deliver this Agreement, the Transaction Documents to which
Purchaser is a party and any certificate, document or other
instrument in connection herewith.
(d) Evidence satisfactory to the Principal
Shareholders that the Purchaser and/or one or more of its
Affiliates has assumed all obligations under (i) the IBMC
Facility (and delivered releases from IBMC of any personal
guarantees of the Shareholders (or other persons) under the IBMC
Facility), and (ii) that certain real property lease relating to
the Company's offices at 100 Quentin Roosevelt Boulevard, Suite
511, Garden City, New York.
SECTION 5.2 DOCUMENTS DELIVERED BY SHAREHOLDERS. On the
-----------------------------------
date hereof, the Shareholders are delivering the stock
certificates representing the Purchased Shares duly endorsed in
blank or accompanied by duly and properly executed stock powers
with all required transfer taxes.
SECTION 5.3 DOCUMENTS DELIVERED BY THE COMPANY. On the
----------------------------------
date hereof, the Company is delivering the following:
(a) Closing Certificate. A certificate, dated the
-------------------
Closing Date, of the Secretary or Assistant Secretary of the
Company certifying that attached or appended to such certificate
(A) is a true and correct copy of the Articles of Incorporation
and all amendments if any thereto as of the date hereof; (B) is a
true and correct copy of its by-laws as of the date hereof;
(C) is a true copy of all corporate actions taken by the board of
directors and the shareholders of the Company (which actions
shall have been taken prior to the date of entering into this
Agreement) to authorize the Contemplated Transactions; and (D)
are the names and signatures of the duly elected or appointed
officers of the Company who are authorized to execute and deliver
this Agreement, the Transaction Documents to which the Company is
a party and any certificate, document or other instrument in
connection herewith;
(b) Consents. True, correct and complete copies of
--------
all Required Consents.
(c) Resignations. The resignations, dated on or
------------
before the date hereof, of all officers and directors of the
Company.
(d) Assets. Possession and control of the Assets.
------
(e) Noncompetition Agreement. The executed
------------------------
Noncompetition Agreement.
(f) Good Standing Certificates. Good standing
--------------------------
certificates for the Company from the Secretary of State of the
State of New York and each of the jurisdictions identified on
Schedule 2.1 in which the Company is qualified to do business as
------------
a foreign corporation.
(g) Books and Records. All books and records relating
-----------------
to the Business or the Company.
(h) General Releases. General Releases from each of
----------------
the Shareholders, substantially in the form annexed hereto as
Exhibit C.
---------
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
------------------------------------------
(a) Notwithstanding any right of Purchaser fully to investigate
the affairs of the Company and any knowledge of facts determined
or determinable by Purchaser pursuant to such investigation or
right of investigation, Purchaser each has the right to rely
fully upon the representations, warranties, covenants and
agreements of the Principal Shareholders and the Shareholders
contained in this Agreement, or listed or disclosed on any
Schedule hereto or in any instrument delivered in connection with
or pursuant to any of the foregoing. The representations and
warranties made by (A) the Shareholders in Section 3.2 with
-----------
respect to due authority and Section 3.1 with respect to title to
-----------
the Purchased Shares, and (B) by the Company in Section 2.15 with
------------
respect to due authority shall survive the execution and delivery
of this Agreement and the closing hereunder. No other
representations or warranties shall survive the Closing of the
transactions contemplated hereunder.
(b) The representations and warranties made by the
Purchaser in Section 4.1 with respect to due authority, shall
-----------
survive the execution and delivery of this Agreement and the
closing hereunder.
SECTION 6.2 OBLIGATION OF THE SHAREHOLDERS TO INDEMNIFY;
-------------------------------------------
SPECIAL INDEMNITY OF PRINCIPAL SHAREHOLDERS. (a) The
-------------------------------------------
Shareholders, on a several basis, hereby agree to indemnify,
defend and hold harmless Purchaser (and its directors, officers,
employees, Affiliates, successors, assigns and representatives)
from and against all Claims, losses, liabilities, damages,
deficiencies, judgments, settlements, costs of investigation or
other expenses (including interest, penalties and reasonable
attorneys' fees and disbursements and expenses incurred in
enforcing this indemnification or in any litigation between the
parties or with third parties) suffered or incurred by Purchaser
or any of the foregoing persons arising out of any breach of the
representations and warranties in Article III hereof
-----------
(collectively, "Losses" or, individually, a "Loss"); provided,
------ ---- --------
however, that any payments required under this Article VI shall
------- ----------
in no event exceed the allocable share of the Purchase Price
attributable to each Shareholder as set forth on Schedule A
----------
hereto (regardless of whether the Shareholder actually receives
such allocable share).
(b) The Principal Shareholders acknowledge that the
Company has previously entered into a Stock Purchase Agreement
with Infotex, Holdings, Ltd. ("Infotex"), under which and subject
-------
to the terms thereof the Company proposed being acquired by
Infotex. Under the terms of such Stock Purchase Agreement,
Infotex deposited $100,000 as partial performance thereunder,
which deposit, the Principal Shareholders represent and warrant,
has been forfeited to the Shareholders. The Principal
Shareholders, on a joint and several basis, hereby agree to
indemnify, defend and hold harmless Purchaser (and its directors,
officers, employees, Affiliates, successors, assigns and
representatives) from and against all Losses relating to or
arising under, directly or indirectly, the Infotex Stock Purchase
Agreement, the retention by the Shareholders of the
aforementioned $100,000 deposit, any other agreement (written or
oral) between Infotex and the Company and/or any of its
shareholders or in any way pertaining in whatsoever manner to
Infotex Stock Purchase Agreement or the transactions contemplated
thereby.
SECTION 6.3 OBLIGATION OF PURCHASER TO INDEMNIFY.
------------------------------------
Purchaser hereby agrees to indemnify, defend and hold harmless
each of the Shareholders (and their respective directors,
officers, employees, Affiliates, successors, heirs, assigns and
Representatives) from and against any Losses suffered by the
Shareholders or any of the foregoing arising out of any breach of
the representations and warranties of Purchaser or of the
covenants and agreements of Purchaser contained in this Agreement
or in the Schedules or any Transaction Documents.
SECTION 6.4 NOTICE AND OPPORTUNITY TO DEFEND THIRD PARTY
--------------------------------------------
CLAIMS. (a) Promptly after receipt by any party hereto (the
------
"Indemnitee") of notice of any demand, claim, circumstance which
----------
would or might give rise to a claim or the commencement (or
threatened commencement) of any action, proceeding or
investigation (an "Asserted Liability") that may result in a
------------------
Loss, the Indemnitee shall give prompt notice thereof (the
"Claims Notice") to the party or parties obligated to provide
-------------
indemnification pursuant to Section 6.2 or 6.3 (the "Indemnifying
----------- --- ------------
Party"). The Claims Notice shall describe the Asserted Liability
-----
in reasonable detail and shall indicate the amount (estimated, if
necessary, and to the extent feasible) of the Loss that has been
or may be suffered by the Indemnitee.
(b) The Indemnifying Party may elect to defend, at its
own expense and with its own counsel, any Asserted Liability,
unless (i) the Asserted Liability seeks an Order, injunction or
other equitable or declaratory relief against the Indemnitee, or
(ii) the Indemnitee shall, upon the written advice of counsel,
have reasonably concluded that (x) there is a conflict of
interest between the Indemnitee and the Indemnifying Party in the
conduct of such defense, or (y) the Indemnitee shall have one or
more defenses not available to the Indemnifying Party. If the
Indemnifying Party elects to defend such Asserted Liability, it
shall within thirty (30) days (or sooner, if the nature of the
Asserted Liability so requires) notify the Indemnitee of its
intent to do so and the reasons therefor, and the Indemnitee
shall cooperate, at the expense of the Indemnifying Party, in the
defense of such Asserted Liability. If the Indemnifying Party
elects not to defend the Asserted Liability, is not permitted to
defend the Asserted Liability by reason of the first sentence of
this Section 6.4(b), fails to notify the Indemnitee of its
--------------
election as herein provided or contests its obligation to
indemnify under this Agreement with respect to such Asserted
Liability, the Indemnitee may pay, compromise or defend such
Asserted Liability at the sole cost and expense of the
Indemnifying Party, unless a court of competent jurisdiction
shall determine otherwise. Notwithstanding the foregoing,
neither the Indemnifying Party nor the Indemnitee may settle or
compromise any claim over the reasonable written objection of the
other, provided that the Indemnitee may settle or compromise any
--------
claim as to which the Indemnifying Party has failed to notify the
Indemnitee of its election as herein provided or is contesting
its indemnification obligations hereunder. In any event, the
Indemnitee and the Indemnifying Party may participate, at their
own expense, in the defense of such Asserted Liability. If the
Indemnifying Party chooses to defend any Asserted Liability, the
Indemnitee shall make available to the Indemnifying Party any
books, records or other documents within its control that are
necessary or appropriate for such defense. Any expenses of any
Indemnitee for which indemnification is available hereunder shall
be paid upon written demand therefor.
SECTION 6.5 Payment of Indemnification Amount. Any payment
---------------------------------
pursuant to this Article VI shall be made not later than thirty
(30) days after receipt by the Indemnifying Party of written
notice from the Indemnitee stating that a Final Determination of
any Loss has occurred, and the amount thereof and of the
indemnity payment requested.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 NOTICES. (a) Any notice or other
-------
communication required or permitted hereunder shall be in writing
and shall be delivered personally by hand or by recognized
overnight courier, telecopied or mailed (by registered or
certified mail, postage prepaid) as follows:
(i) If to Purchaser, one copy to:
Paramount Financial Corporation
One Jericho Plaza
Jericho, New York 11753
Telecopier: (516) 938-3995
Attention: Glenn Nortman, Chief Executive
Officer
with a simultaneous copy to:
Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Telecopier: (212) 603-2001
Attention: Danal F. Abrams, Esq.
(ii) If to the Shareholders, one copy to:
Comptech Resources
100 Quentin Roosevelt Blvd.
Garden City, New York 11530
Telecopier: (516) 794-8089
Attention: Stuart A. Belloff
with a simultaneous copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036-8299
Telecopier: (212) 969-2900
Attention: Neil S. Belloff, Esq.
(b) Each such notice or other communication shall be
effective (i) if given by telecopier, when such telecopy is
transmitted to the telecopier number specified in Section 7.1(a)
--------------
(with confirmation of such transmission), or (ii) when delivered
at the address specified in Section 7.1(a). Any party by notice
--------------
given in accordance with this Section 7.1 to the other party may
designate another address or person for receipt of notices
hereunder. Notices by a party may be given by counsel to such
party.
SECTION 7.2 ENTIRE AGREEMENT. This Agreement (including
----------------
the Schedules and Exhibits hereto) and the collateral agreements
executed in connection with the consummation of the Contemplated
Transactions contain the entire agreement between the parties
with respect to the subject matter hereof and related
transactions and supersede all prior agreements, written or oral,
with respect thereto.
SECTION 7.3 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL
---------------------------------------
REMEDIES; PRESERVATION OF REMEDIES. This Agreement may be
----------------------------------
amended, superseded, canceled, renewed or extended only by a
written instrument signed by the parties hereto. The provisions
hereof may be waived in writing by the parties hereto. No delay
on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any such right, power or
privilege, nor any single or partial exercise of any such right,
power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. Except as
otherwise provided herein, the rights and remedies herein
provided are cumulative and are not exclusive of any rights or
remedies that any party may otherwise have at law or in equity.
SECTION 7.4 GOVERNING LAW. This Agreement shall be
-------------
governed and construed in accordance with the laws of the State
of New York applicable to agreements made and to be performed
entirely within such State, without regard to the conflict of
laws rules thereof.
SECTION 7.5 ARBITRATION. The parties hereto irrevocably
-----------
agree that any dispute arising out of this Agreement shall be
adjudicated in Nassau County, in the State of New York, before a
single arbitrator of the American Arbitration Association
applying Commercial Arbitration rules.
SECTION 7.6 BINDING EFFECT; NO ASSIGNMENT. This Agreement
-----------------------------
and all of its provisions, rights and obligations shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors, heirs and legal representatives.
This Agreement may not be assigned (including by operation of
Law) by a party without the express written consent of Purchaser
(in the case of assignment by the Shareholders) or the
Shareholders (in the case of assignment by Purchaser) and any
purported assignment, unless so consented to, shall be void and
without effect; provided, that the benefits hereunder (but not
--------
the obligations) of Purchaser may be assigned by Purchaser.
Except to the extent so assigned, nothing herein express or
implied is intended or shall be construed to confer upon or to
give anyone other than the parties hereto and their respective
heirs, legal representatives and successors any rights or
benefits under or by reason of this Agreement and no other party
shall have any right to enforce any of the provisions of this
Agreement.
SECTION 7.7 EXHIBITS. All Exhibits and Schedules attached
--------
hereto are hereby incorporated by reference into, and made a part
of, this Agreement.
SECTION 7.8 SEVERABILITY. If any provision of this
------------
Agreement for any reason shall be held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability
shall not affect any other provision of this Agreement, but this
Agreement shall be construed as if such illegal, invalid or
unenforceable provision had never been included herein.
SECTION 7.9 COUNTERPARTS. The Agreement may be executed in
------------
any number of counterparts, each of which shall be deemed to be
an original as against any party whose signature appears thereon,
and all of which shall together constitute one and the same
instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear
the signatures of all of the parties reflected hereon as the
signatories.
SECTION 7.10 EXPENSES. Except as otherwise specifically
--------
provided in this Agreement, the parties hereto shall bear their
respective expenses incurred in connection with the preparation,
execution and performance of this Agreement and the Contemplated
Transactions, including, without limitation, all fees and
expenses of their respective representatives.
SECTION 7.11 FURTHER ASSURANCES. The Shareholders hereby
------------------
agree, without further consideration, to execute and deliver at
or following the date hereof such instruments of transfer and
take such other action as the other parties may reasonably
request in order to put Purchaser in possession of, and to vest
in Purchaser, good, valid and unencumbered title to the Purchased
Shares or the Assets in accordance with this Agreement and to
otherwise give effect to the Contemplated Transactions.
ARTICLE VIII
DEFINITIONS
SECTION 8.1 DEFINITIONS. (a) The following terms, as used
-----------
herein, have the following meanings:
"Affiliate" of any person means any other person directly or
---------
indirectly through one or more intermediary persons,
controlling, controlled by or under common control with such
person.
"Agreement" or "this Agreement" means, and the words
--------- --------------
"herein", "hereof" and "hereunder" and words of similar import
------ ------ ---------
refers to, this agreement as it from time to time may be amended.
"Assets" means properties, rights, interests and assets of
------
every kind, real, personal or mixed, tangible and intangible,
used or usable in the Business.
The term "audit" or "audited" when used in regard to
----- -------
financial statements means an examination of the financial
statements by a firm of independent certified public accountants
in accordance with generally accepted auditing standards for the
purpose of expressing an opinion thereon.
"Certificate of Incorporation" means, in the case of any
----------------------------
corporation, the certificate of incorporation, articles of
incorporation or charter of a corporation, howsoever denominated
under the laws of the jurisdiction of its incorporation.
"Contract" means any contract, agreement, indenture, note,
--------
bond, lease, conditional sale contract, mortgage, license,
franchise, instrument, commitment or other binding arrangement,
whether written or oral, which involves an amount in excess of
$10,000.00.
"Code" means the Internal Revenue Code of 1986, as amended.
----
The term "control", with respect to any person, means the
-------
power to direct the management and policies of such person,
directly or indirectly, by or through stock ownership, agency or
otherwise, or pursuant to or in connection with an agreement,
arrangement or understanding (written or oral) with one or more
other persons by or through stock ownership, agency or otherwise;
and the terms "controlling" and "controlled" have meanings
----------- ----------
correlative to the foregoing.
"Environmental Laws" means any and all Laws, Orders,
------------------
Permits, agreements or any other requirement or restriction
promulgated, imposed, enacted or issued by any federal, state,
local and/or foreign Governmental Bodies relating to human health
or the environment, including the emission, discharge or Release
of pollutants, contaminants, Hazardous Substances or wastes into
the environment (which includes, without limitation, ambient air,
surface water, ground water, or land), and the remediation
thereof, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof, including
without limitation, the Clean Air Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the
Emergency Planning and Community Right To Know Act, the Federal
Water Pollution Control Act, the Oil Pollution Act of 1990, the
Pollution Prevention Act of 1990, the Resource Conservation and
Recovery Act, the Safe Drinking Water Act, the Endangered Species
Act, the Toxic Substances Control Act, each as amended, and any
state or local counterparts thereof.
"Environmental Permits" with respect to the Company means
---------------------
those Permits required to be obtained by the Company under
Environmental Laws in connection with the Business or the use and
operation of the Assets owned or leased by them.
"ERISA" means the Employee Retirement Income Security Act of
-----
1974, as amended.
"Final Determination" means (i) with respect to United
-------------------
States federal income Taxes, a "determination" as defined in
Section 1313(a) of the Code or execution of an Internal Revenue
Service Form 870AD; (ii) with respect to Taxes other than United
States federal income Taxes, any final determination of liability
in respect of a Tax provided for under applicable Law, provided,
--------
however, that if the meaning of "Final Determination" under
-------
foreign, state or local law is unclear, "Final Determination"
shall mean the expiration of the statute of limitations for
claiming a refund or asserting a deficiency, whichever is later,
with respect to the payment of Taxes in question; and (iii) any
final determination of liability in respect of a Loss provided
for under applicable law.
"GAAP" means generally accepted accounting principles in
----
effect on the date hereof as set forth in the opinions and
pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by
a significant segment of the accounting profession of the United
States.
"Hazardous Substances" means any dangerous, toxic,
--------------------
radioactive, caustic or otherwise hazardous material, pollutant,
contaminant, chemical, waste or substance defined, listed or
described as any of such in or governed by any Environmental Law,
including but not limited to, urea-formaldehyde, polychlorinated
biphenyls, asbestos or asbestos-containing materials, radon,
explosives, known carcinogens, petroleum and its derivatives,
petroleum products, or any substance which might cause any injury
to human health or safety or to the environment or might subject
the owner or operator of real property owned, leased or
controlled by the Company (both currently or ever in the present)
to any Regulatory Actions or Claims.
"Inventory" means, as of any date, collectively, all
---------
inventories of merchandise and other products owned by the
Company and held for resale or for distribution, together with
packaging and samples thereof, operating supplies and spare or
maintenance parts owned by the Company as of such date.
"IRS" means the Internal Revenue Service.
---
The term "knowledge" with respect to (a) any individual
---------
means actual knowledge, and (b) any corporation means the actual
knowledge of the directors or the officers of such corporation;
and "knows" has a correlative meaning.
-----
"Liability" means any direct or indirect indebtedness,
---------
liability, assessment, claim, loss, damage, deficiency,
obligation or responsibility, fixed or unfixed, choate or
inchoate, liquidated or unliquidated, secured or unsecured,
accrued, absolute, actual or potential, contingent or otherwise
(including any liability under any guaranties, letters of credit,
performance credits or with respect to insurance loss accruals).
"Lien" means, with respect to any Asset, any mortgage, lien
----
(including mechanics, warehousemen, laborers and landlords
liens), claim, pledge, charge, security interest, preemptive
right, right of first refusal, option, judgment, title defect or
encumbrance of any kind in respect of or affecting such Asset.
The term "person" means an individual, corporation,
------
partnership, joint venture, association, trust, unincorporated
organization or other entity, including a government or political
subdivision or an agency or instrumentality thereof.
"Regulatory Actions" means any claim, demand, action, suit
------------------
or proceeding brought or instigated by any Governmental Body in
connection with any Environmental Law, including, without
limitation, civil, criminal and/or administrative proceedings,
whether or not seeking costs, damages, penalties or expenses.
"Release" means the intentional or unintentional, spilling,
-------
leaking, disposing, discharging or disturbance of, or emitting,
depositing, injecting, leaching, escaping or any other release or
threatened release, however defined, of any Hazardous Substance.
"Subsidiary" of the Company means any entity of which
----------
securities or other ownership interests having ordinary voting
power to elect a majority of the board of directors or other
persons performing similar functions are owned directly or
indirectly through one or more intermediaries, or both, by the
Company.
"Tax" (including, with correlative meaning, the terms
---
"Taxes" and "Taxable") means (i) any net income, gross income,
----- -------
gross receipts, sales, use, ad valorem, transfer, transfer gains,
franchise, profits, license, withholding, payroll, employment,
social security (or similar), unemployment, disability, excise,
severance, stamp, rent, recording, registration, occupation,
premium, real or personal property, intangibles, environmental
(including taxes under Code S. 59A) or windfall profits tax,
alternative or add-on minimum tax, capital stock, customs duty or
other tax, fee, duty, levy, impost, assessment or charge of any
kind whatsoever (including but not limited to taxes assessed to
real property and water and sewer rents relating thereto),
together with any interest and any fine, penalty, addition to tax
or additional amount or deductions imposed by any Governmental
Body (domestic or foreign) (a "Tax Authority") responsible for
-------------
the imposition of any such tax, whether disputed or not,
including any liability arising under any tax sharing agreement,
with respect to the Company, the Business or the Assets (or the
transfer thereof); (ii) any liability for the payment of any
amount of the type described in the immediately preceding clause
(i) as a result of the Company being a member of an affiliated or
combined group with any other corporation at any time on or prior
to the Closing Date; and (iii) any liability of the Company for
the payment of any amounts of the type described in the
immediately preceding clause (i) as a result of a contractual
obligation to indemnify any other person.
"Tax Return" means any return or report (including
----------
elections, declarations, disclosures, schedules, attachments,
estimates and information returns) relating to Taxes required to
be supplied to any Tax Authority, and including any amendment
thereof.
"Transaction Documents" means, collectively, this Agreement,
---------------------
and each of the other agreements and instruments to be executed
and delivered by all or some of the parties hereto in connection
with the consummation of the transactions contemplated hereby.
The term "voting power" when used with reference to the
------------
capital stock of, or units of equity interests in, any person
means the power under ordinary circumstances (and not merely upon
the happening of a contingency) to vote in the election of
directors of such person (if such person is a corporation) or to
participate in the management and control of such person (if such
person is not a corporation).
(b) The following additional terms are defined in the
following sections of this Agreement:
TERM SECTION
---- -------
Acquired Name Recital
Asserted Liability 6.4(a)
Belloff Recital
Benefit Plans 2.10(b)
Business Recital
Claims 2.8
Claims Notice 6.4(a)
Company Recital
Condition of the Business 2.1(a)
Contemplated Transactions Recital
Controlled Group 2.10(a)
December 1997 Statement 2.3
Employment Agreement(s) Recital
Governmental Bodies 2.11
IBMC Facility 2.4
Indemnifying Party 6.4(a)
Indemnitee 6.4(a)
Infotex 6.2(b)
Krinsky Recital
Latest Balance Sheet 2.4
Latest Balance Sheet Date 2.4
Laws 2.11
Losses 6.2
Noncompetition Agreement Recital
Orders 2.11
Permits 2.12
Purchase Price 1.1
Purchased Shares Recital
Purchaser Recital
Real Property Leases 2.6(a)
Required Consents 2.14
Shareholder(s) Recital
SECTION 8.2 INTERPRETATION. Unless the context otherwise
--------------
requires, the terms defined in Section 8.1 shall have the
-----------
meanings herein specified for all purposes of this Agreement,
applicable to both the singular and plural forms of any of the
terms defined herein. All accounting terms defined in
Section 8.1, and those accounting terms used in this Agreement
-----------
not defined in Section 8.1, except as otherwise expressly
-----------
provided herein, shall have the meanings customarily given
thereto in accordance with GAAP. When a reference is made in
this Agreement to Sections, such reference shall be to a Section
of this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation".
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date set forth above.
COMPTECH ACQUISITION CORPORATION
By: /s/ Glenn Nortman
---------------------------
Name: Glenn Nortman
Title: President
ABBEY, GARRETT & SETH, LTD.
By: /s/ Stuart A. Belloff
---------------------------
Name: Stuart A. Belloff
Title: President
AMIE BELLOFF
/s/ Amie Belloff
---------------------------
ABBEY KRINSKY
/s/ Abbey Krinsky
-----------------------------
NEERAJ RAJPAL
/s/ Neeraj Rajpal
----------------------------
GENE DRYFUSS
/s/ Gene Dryfuss
----------------------------
GARY KRUPP
/s/ Gary Krupp
---------------------------
NEIL BELLOFF
/s/ Neil Belloff
----------------------------
WILLIAM PAGAN
/s/ William Pagan
-----------------------------
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of this 28th day of
July, 1998, by and among PARAMOUNT FINANCIAL CORPORATION, a
Delaware corporation (the "Parent"), DELTAFORCE PERSONNEL SERVICES,
------
INC., a New York corporation and a wholly-owned subsidiary of the
Parent (the "Purchaser"), RBW STAFFING RESOURCES INC., a New York
---------
corporation ("WordSmiths" or the "Company"), and Robert Klein
---------- -------
("Klein"), the sole shareholder of the Company.
-----
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company is in the business among other
things, of providing temporary legal support staffing and
temporary personnel services to the legal community (which
business as currently conducted is referred to as the
"Business"); and --------
WHEREAS, WordSmiths desires to sell and transfer to
Purchaser, and Purchaser desires to purchase and acquire from
WordSmiths, all of WordSmiths' right, title and interest in and
to the name "WORDSMITHS," the Company's customer list, the
Company's applicant base directory and all of the Business
computer software and computer systems (collectively the
"Purchased Assets"); and
----------------
WHEREAS, in furtherance of the consummation of the
acquisition of the Purchased Assets and the other transactions
contemplated hereby (the "Contemplated Transactions"), the parties
-------------------------
hereto desire to enter into this Agreement.
NOW THEREFORE, in consideration of the premises and
mutual covenants and agreements set forth herein, the parties
hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF PURCHASED ASSETS
SECTION 1.1 PURCHASED ASSETS. Effective as of the close of
----------------
business on the date hereof, the Company hereby assigns,
transfers, sells, conveys and delivers to Purchaser, and
Purchaser hereby purchases and acquires from the Company, all of
the Company's right, title and interest in and to the Purchased
Assets, free and clear of any mortgage, lien (including
mechanics, warehouse, laborers and landlords liens), claim,
pledge, charge, security interest, preemptive right, right of
first refusal, option, judgment, title defect or encumbrances of
any kind, other than the European American Bank lien for which a
UCC-3 terminating such lien is presently being obtained by the
Company and will be delivered simultaneously herewith
(collectively, "Liens"). The Company's customer list, applicant
-----
base directory and a list of the Business computer software
and computer systems are being delivered to Purchaser
concurrent with the execution hereof.
SECTION 1.2 PURCHASE PRICE. As full consideration for the
--------------
Purchased Assets, concurrently herewith the Purchaser is paying
to or for the account of the Company an amount equal to $350,000,
payable as follows: (a) Two Hundred Fifty Thousand Dollars
($250,000) cash pursuant to wire transfer instructions provided
to Purchaser by the Company, and (b) a promissory note of the
Purchaser (the "Note") in the principal amount of One Hundred
----
Thousand Dollars ($100,000), in the form annexed hereto as Exhibit
-------
A. The Note bears interest at eight and one half percent (8.5%)
-
per annum and is payable in one payment of One Hundred Thousand
Dollars ($100,000) plus accrued and unpaid interest on the
principal. The Note is due and payable on the first anniversary
of the date of this Agreement.
SECTION 1.3 ALLOCATION. The parties agree that the
----------
consideration paid under this Agreement and the Transaction
Documents (as defined below) will be allocated in accordance with
the manner indicated in this Agreement and the Transaction
Documents. The Purchaser, Parent, the Company and Klein hereby
each covenant and agree that it/he will not take a position on
any income tax return (including any report filed on Internal
Revenue Form 8594), before any governmental agency charged with
the collection of any income tax or in any judicial proceeding,
any financial reporting, or in any Securities and Exchange
Commission reporting that is in any way inconsistent with the
terms of this Section 1.3.
SECTION 1.4 NO ASSUMPTION OF LIABILITIES. Regardless of
----------------------------
whether any of the following is disclosed to Purchaser, Parent or
any of their representatives or otherwise or whether Purchaser,
Parent or any of their representatives may have knowledge of the
same, Purchaser shall have no liability for, and shall be under
no obligation to assume, and shall not be deemed to be and is not
assuming, any Lien or other obligation, liability, contract or
commitment of the Company of any kind or nature whatsoever,
including but not limited to, (a) any liability under any account
payable, lease, note, indenture, loan agreement, employment
contract, agreement containing severance or termination pay
arrangements or deferral compensation agreement or any other
contract or agreement (written or oral) relating to the Company
or the Business; (b) any liability of the Company for federal,
state or local taxes, including without limitation, any income,
capital gains or franchise taxes, or any taxes on capital
(including any taxes payable as a result of the Contemplated
Transactions); (c) any liability or obligation whatsoever of the
Company under, or directly or indirectly relating to, any
employee benefit plan or any other plans, programs or
arrangements of any kind relating to employee benefits sponsored
or maintained by the Company; (d) any liability or obligation of
the Company for claims covered by the Company's insurance
policies arising out of any act or omission occurring or state of
facts existing prior to or after the date hereof, including
without limitation, workers' compensation, general liability,
fire and property insurance policies, and any liability or
obligation of the Company for premiums which may be due or are
payable under any such insurance policy; and (e) any liability of
the Company relating to the Business or otherwise (collectively,
the "Company Liabilities").
-------------------
ARTICLE II
AGREEMENTS DELIVERED CONCURRENTLY HEREWITH
Simultaneously herewith, in connection with the consummation
of the Contemplated Transactions, Purchaser is entering into an
employment agreement and a noncompetition agreement with Klein,
and a noncompetition agreement with Jeffrey Klein (collectively
with all other documents or instruments delivered hereunder, the
"Transaction Documents"). The following Transaction Documents are
---------------------
fully executed and delivered concurrently herewith as follows:
SECTION 2.1 Employment Agreement. Concurrently herewith,
--------------------
Purchaser is entering into a two-year employment agreement with
Klein (the "Employment Agreement"), dated the date of this
--------------------
Agreement, in the form annexed hereto as Exhibit B.
---------
SECTION 2.2 NONCOMPETITION AGREEMENTS. (a) In connection
-------------------------
with the consummation of the Contemplated Transactions, Klein is
concurrently herewith entering into a five year noncompetition
agreement (the "Noncompetition Agreement") with Purchaser, dated as
------------------------
of the date of this Agreement, in the form annexed hereto as
Exhibit C.
---------
(b) In connection with the consummation of the
Contemplated Transaction, Jeffrey Klein is concurrently herewith
entering into a noncompetition agreement with Purchaser, dated as
of the date of this Agreement, in the form annexed hereto as
Exhibit D.
---------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company and Klein, jointly and severally, represent and
warrant to Purchaser and Parent, as of the date of this
Agreement, that:
SECTION 3.1 CORPORATE EXISTENCE AND POWER; TITLE TO PURCHASED
-------------------------------------------------
ASSETS. (a) The Company is a corporation duly organized, validly
------
existing and in good standing under the laws of the State of New
York, and has all requisite powers and all material permits
required to own, lease and operate its properties and to conduct
the Business as currently conducted.
(b) The Company does not have any subsidiaries and
does not directly or indirectly own any interest or investment in
any other person.
(c) The Company has, and pursuant to this Agreement is
conveying, selling, transferring, assigning and delivering to
Purchaser, good, valid, marketable, legal and beneficial title to
all of the Purchased Assets and is the lawful owner of the
Purchased Assets, free and clear of all Liens.
SECTION 3.2 AUTHORITY RELATIVE TO THIS AGREEMENT. The
------------------------------------
Company has full power and authority to execute and deliver this
Agreement and each other Transaction Document to which it is a
party and to consummate the Contemplated Transactions. The
execution, delivery and performance by the Company of this
Agreement and the other Transaction Documents to which it is a
party, and the consummation by it of the Contemplated
Transactions, have been duly and validly authorized and approved
by the Company's board of directors and shareholders, and no
other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery by the Company
of this Agreement or the other Transaction Documents to which the
Company is a party or the consummation of the Contemplated
Transactions. This Agreement and the other Transaction Documents
to which the Company is a party have been duly and validly
executed and delivered by the Company, and (assuming the valid
execution and delivery thereof by the other parties thereto)
constitute the legal, valid and binding agreements of the
Company, enforceable against the Company, in accordance with
their respective terms, except as such obligations and their
enforceability may be limited by applicable bankruptcy and other
similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies
is subject to the discretion of the court before which any
proceeding therefor may be brought (whether at law or in equity).
SECTION 3.3 NO CONFLICTS; CONSENTS. Neither the execution,
----------------------
delivery and performance by the Company of this Agreement and
each other Transaction Document to which it is a party, nor the
consummation of the Contemplated Transactions (i) violates any
provision of the Articles of Incorporation or by-laws of the
Company; (ii) requires the Company to obtain any consent,
approval, permit or action of or waiver from, or make any filing
with, or give any notice to, any governmental body, or any other
person; (iii) violates, conflicts with or results in a breach or
default under (after the giving of notice or the passage of time
or both), or permits the termination of, any contract, right,
other obligation or restriction relating to or which affects the
Purchased Assets or the Business or to which the Company is a
party or by which the Company, the Business or any of the
Purchased Assets may be bound or subject, or results in the
creation of any Lien upon any of the Purchased Assets pursuant to
the terms of any such contract; (iv) violates any law or order of
any governmental body against, or binding upon, the Company or
upon the Purchased Assets or the Business of the Company; or (v)
violates or results in the revocation or suspension of any permit
necessary for the conduct of the Business.
SECTION 3.4 CHARTER DOCUMENTS AND CORPORATE RECORDS. (a)
---------------------------------------
The Company has heretofore delivered to Purchaser and Parent true
and complete copies of the Articles of Incorporation and by-laws
of the Company as in effect on the date hereof. The stock and
transfer books of the Company have been made available to
Purchaser and Parent for their inspection and are true and
complete. The Company has heretofore permitted Purchaser and
Parent to inspect true and complete copies of the minutes of
meetings (or written consents in lieu of meetings) of the board
of directors (and all committees thereof) and shareholders of the
Company. All actions taken by the board of directors (and all
committees thereof) and shareholders of the Company are reflected
in such minutes, written consents and other documentation.
(b) All financial, business and accounting books,
ledgers, accounts and official and other records relating to the
Company, the Business and the Purchased Assets have been properly
and accurately kept and completed in all material respects, and
there are no material inaccuracies or discrepancies contained or
reflected therein, other than the disputed
classification/assessment by the Department of Labor of the
employees of WordSmiths relating to tax treatment of such
employees, which is presently being appealed by WordSmiths (the
"Department of Labor Claim").
-------------------------
SECTION 3.5 FINANCIAL INFORMATION. The Company has
---------------------
previously furnished to Purchaser and Parent true and complete
copies of (i) the Company's unaudited financial statements at and
for the year ended June 30, 1997 (the "June 1997 Statement"), (ii)
-------------------
the Company's unaudited financial statements at and for the years
ended June 30, 1996 and 1995, and (iii) the Company's unaudited
statements reflecting revenues and expenses for the calendar
quarters and eleven months ended May 31, 1998 and 1997
(collectively, the "Interim Statements"). The Interim Statements
------------------
accurately present the revenue and expenses of the Company on a
cash basis for the periods then ended. The June 1997 Statement
has been prepared in a manner consistent with the Company's past
practices and accurately present the financial position of the
Company as of its date and results of operations for the period
then ended.
SECTION 3.6 ABSENCE OF CERTAIN CHANGES. Since the June 1997
--------------------------
Statement, except as set forth in this Agreement, the Company has
conducted the Business in the ordinary course consistent with
past practices and there has not been:
(a) Any material adverse change in the Business,
assets, financial condition, prospects or results of operations
of the Company (collectively, the "Condition of the Business") or
-------------------------
any event, occurrence or circumstance that could reasonably be
expected to cause such a material adverse change;
(b) Any material adverse change in the relationships
of the Company with its customers and applicants; or
(c) Except for any changes made in the ordinary course
of the Business, any material change in any of the Company's
business policies, including advertising, marketing, pricing,
purchasing, personnel, returns or budget policies.
SECTION 3.7 INTANGIBLE PROPERTY. (a) The Company owns a
-------------------
doing-business-as (d/b/a) in and to the name "WordSmiths" (the
"Acquired Name") filed in New York County, New York and any and all
-------------
other intellectual property rights necessary to conduct the
Business and there are no agreements, arrangements, claims or any
other rights of any character entitling any person other than
Purchaser to any interest in the Acquired Name and the Company's
other intellectual property rights;
(b) the Company has not received any notice contesting
the Company's right to use the Acquired Name;
(c) the Acquired Name and any other intellectual
property rights of the Company have not been and are not the
subject of any pending or, to the Company's or Klein's knowledge,
threatened litigation or claim of infringement.
SECTION 3.8 CLAIMS AND PROCEEDINGS. There are no outstanding
----------------------
orders of any governmental body against or involving the Company,
the Purchased Assets or the Business, other than the Department
of Labor Claim. Other than the Department of Labor Claim, there
are no actions, suits, claims or counterclaims or legal,
administrative or arbitral proceedings or investigations,
(collectively, "Claims") (whether or not the defense thereof
------
or liabilities in respect thereof are covered by insurance),
pending or, to the Company's or Klein's knowledge, threatened on
the date hereof, against or involving the Company, any of the
Purchased Assets or the Business. There is no fact, event or
circumstance known to the Company or Klein that would give rise
to any Claim other than the Department of Labor Claim that, if
pending or threatened would, in the Company's or Klein's reasonable
judgment, have an adverse effect on the Condition of the Business.
SECTION 3.9 COMPLIANCE WITH LAWS. The Company is not in
--------------------
violation of any order, judgment, injunction, award, citation,
decree, consent decree or writ, or any law, statute, code,
ordinance, rule, regulation or other requirement, of any
government or political subdivision thereof, whether federal,
state, local or foreign, or any agency or instrumentality of any
such government or political subdivision, or any court or
arbitrator affecting the Purchased Assets or the Business, other
than the Department of Labor Claim.
SECTION 3.10 PERMITS. The Company has obtained all licenses,
-------
permits, certificates, certificates of occupancy, orders,
authorizations and approvals of (collectively, "Permits"), and
-------
has made all required registrations and filings with, any
governmental body that are required for the conduct of the
Business. All Permits that are required for the conduct of the
Business are in full force and effect; no violations are or have
been recorded in respect of any Permit; and no proceeding is
pending or threatened to revoke or limit any Permit. No Permit
will terminate by reason of consummation of this Agreement.
SECTION 3.11 CUSTOMERS; APPLICANTS. The relationships of the
---------------------
Company with its customers are reasonable commercial working
relationships and (i) all amounts owing from such customers, if
not in dispute, have been paid in accordance with their
respective terms, (ii) none of such customers within the last
twelve months has threatened in writing to cancel, or otherwise
terminate, the relationship of such person with the Company, and
(iii) to the Company's or Klein's knowledge, none of such
customers during the last twelve months has decreased materially
or threatened to decrease or limit materially its relationship
with the Company or intends to decrease or limit materially its
business with the Company. There has been no reduction in the
number or quality of the applicants available to the Company
beyond levels normally experienced in the ordinary course of the
Company's Business.
SECTION 3.12 DISCLOSURE. Neither this Agreement, nor any
----------
audited or unaudited financial statements, documents or
certificates furnished or to be furnished to Purchaser, Parent or
any of their representatives or affiliates by or on behalf of the
Company pursuant to this Agreement or in connection with this
Agreement contains to the best of the Company's or Klein's
knowledge or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary in order
to make the statements contained herein or therein not
misleading. There are no facts known to Klein or the Company and
not disclosed herein, which might reasonably be expected to
directly and materially adversely affect the value of the
Purchased Assets or the Condition of the Business. All
representations and warranties made by the Company or Klein will
be deemed to have been relied on by Purchaser and Parent
(notwithstanding any investigation by Purchaser).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER AND PARENT
SECTION 4.1 CORPORATE EXISTENCE AND POWERS. (a) The
------------------------------
Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York, and has
all requisite powers and all material permits required to own,
lease and operate its properties and to conduct its businesses.
(b) The Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State
of Delaware, and has the requisite powers and all material
permits required to own, lease and operate is properties and to
conduct is business.
SECTION 4.2 AUTHORITY RELATIVE TO THIS AGREEMENT. The
------------------------------------
Purchaser and the Parent have the full power and authority to
execute and deliver this Agreement and each other Transaction
Document to which it is a party and to consummate the
Contemplated Transactions. The execution, delivery and
performance by the Purchaser and the Parent of this Agreement and
the other Transaction Documents to which it is a party, and the
consummation by them of the Contemplated Transactions, have been
duly and validly authorized and approved by each of the
Purchaser's and the Parent's board of directors, and no other
corporate proceedings on the part of the Purchaser or the Parent
are necessary to authorize the execution and delivery by the
Purchaser and the Parent of this Agreement or the other
Transaction Documents to which the Purchaser or Parent is a party
or the consummation of the Contemplated Transaction. This
Agreement and the other Transaction Documents to which the
Purchaser or the Parent is a party have been duly and validly
executed and delivered by the Purchaser or the Parent, and
(assuming the valid execution and delivery thereof by the other
parties thereto) constitute the legal, valid and binding
agreements of the Purchaser and the Parent, enforceable against
the Purchaser and the Parent in accordance with their respective
terms, except such obligations and their enforceability may be
limited by applicable bankruptcy or other similar laws affecting
the enforcement of creditors' rights generally and except for the
availability of equitable remedies subject to the discretion of
the court before which any proceeding may be brought (whether at
law or in equity).
SECTION 4.3 NO CONFLICTS; CONSENTS. Neither the execution,
----------------------
delivery and performance by the Purchaser or the Parent of this
Agreement and each of the other Transaction Documents to which it
is a party, nor the consummation of the Contemplated Transactions
(i) violates any provision of the Articles of Incorporation or
by-laws of either the Purchaser or the Parent; (ii) requires the
Purchaser or the Parent to obtain any consent, approval permit or
action or waiver from, or make any filings with, or give any
notice to, any governmental body, or any other person; (iii)
violates any law or order of any governmental body against or
binding upon the Purchaser or the Parent; or (iv) violates and
results in the revocation suspension of any permit necessary for
the conduct of the Purchaser's or the Parent's business.
SECTION 4.4 LITIGATION. There are no claims, actions, suits,
----------
proceedings or investigations, whether legal or administrative,
at law or in equity, pending or the best of Purchaser or Parent's
knowledge threatened against the Purchaser or the Parent
involving or effecting the Purchaser's ability to perform its
obligations hereunder or under the other Transaction Documents to
which it is a party.
ARTICLE V
AGREEMENTS RELATING TO THE COLLECTION OF
ACCOUNTS RECEIVABLE
(a) All outstanding accounts receivable of the Company
on the date hereof (the "Receivables") shall be collected by
-----------
Purchaser on behalf of and for the account of the Company. The
Purchaser agrees to utilize the same level of collection efforts
that it would use in the ordinary course of the collection of
receivables for its own account, provided that Purchaser shall not
--------
be required in any event to bring any legal action or institute
other extraordinary collection efforts to collect Receivables.
Any payments of receivables received by Purchaser after the date
hereof shall be deemed to be received on a "first-in-first-out"
basis so that all such payments will be first credited towards
the Receivables due from a particular account debtor until the
entire amount of such account debtor's Receivables is paid in
full to the Company (after which time all receivables from such
account debtor shall be for Purchaser's account), provided, that
--------
if a particular payment of a receivable received by Purchaser
specifically indicates that it is in payment for services provided
after the date hereof, such receivable shall not be subject to this
Article V and may be retained by Purchaser, and provided further,
----------------
that any Receivables which are the subject of a dispute with the
applicable account debtor (a "Disputed Receivable") shall be
-------------------
segregated from other Receivables of such account debtor and do not
need to be collected prior to such account debtor's being deemed
to have been paid in full.
(b) The Purchaser will remit to the Company weekly,
commencing on a date two weeks after the date hereof, the
Receivables collected during the preceding week along with
documentation specifically identifying the client and the invoice
paid.
(c) Further, Purchaser will promptly bill on behalf of
the Company for any services performed prior to the effective
date of this Agreement but for which time cards were not
submitted either to the Company or Purchaser until after the
effective date of this Agreement. Purchaser will provide the
Company with copies of all invoices for services so billed and
will remit in accordance with the above paragraph (b) any monies
received for services performed prior to the effective date of
this Agreement. Subject to paragraph (a) of this Article V, all
revenues (whether billed or unbilled) generated for services
rendered by the Business prior to the effective date of this
Agreement belong to the Company, and all revenues generated by
the Assets for services rendered by Purchaser on and after the
effective date shall belong to the Purchaser.
(d) The Company shall not institute any legal action
or collection efforts with respect to a Disputed Receivable until
such Disputed Receivable remains unpaid for 90 days following the
date of the invoice. Prior to institution any such action or
effort, the Company shall notify Purchaser of its intent to
undertake same. If within 10 business days of notification,
Purchaser fails to collect the Disputed Receivable or notify the
Company that Purchaser is buying the Disputed Receivable from
Company for the face value, the Company is free to pursue
whatever collection efforts or legal action it deems appropriate
to collect the Disputed Receivable.
(e) Until all Receivables have been paid or purchased
by Purchaser, the Company and its accountants shall have the
right, upon reasonable notice, during normal business hours, to
examine the books and records of Purchaser relating to the
Receivables.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE
-------------------------------------------------
COMPANY AND KLEIN. Notwithstanding any right of Purchaser and
-----------------
Parent fully to investigate the affairs of the Company and any
knowledge of facts determined or determinable by Purchaser and
Parent pursuant to such investigation or right of investigation,
Purchaser and Parent each has the right to rely fully upon the
representations, warranties, covenants and agreements of the
Company and Klein contained in this Agreement or in any
instrument delivered in connection with or pursuant to any of the
foregoing. All such covenants and agreements of the Company and
Klein shall survive the execution and delivery of this Agreement.
All of such representations and warranties made by the Company
and Klein shall survive the execution and delivery of this
Agreement for a period of two (2) years following the date of
this Agreement; provided, that the representations and warranties
--------
made by the Company and Klein in Section 3.2 with respect to due
authority shall survive the execution and delivery of this
Agreement.
SECTION 6.2 OBLIGATION OF THE COMPANY AND KLEIN TO INDEMNIFY.
------------------------------------------------
The Company and Klein, jointly and severally, agree to indemnify,
defend and hold harmless Purchaser and Parent (and their
respective directors, officers, employees, affiliates,
successors, assigns and representatives) from and against all
Claims, losses, liabilities, damages, deficiencies, judgments,
settlements, costs of investigation or other expenses (including
interest, penalties and reasonable attorneys' fees and
disbursements and expenses incurred in enforcing this
indemnification or in any litigation between the parties or with
third parties) (collectively, the "Losses") suffered or incurred
------
by Purchaser, Parent or any of the foregoing persons arising out
of (a) any breach of the representations, warranties, covenants
and agreements of the Company or Klein contained in this Agreement
or any Transaction Document, or (b) any Company Liability whether
arising prior to or after the date of this Agreement. The amount of
such indemnification shall be limited to the sum of the purchase
price paid hereunder and the aggregate amounts paid under the
Employment Agreement and the Noncompetition Agreement.
Notwithstanding anything to the contrary contained in this
Agreement and the Transaction Documents, neither the Purchaser
nor the Parent shall have any rights, remedies or recourse against
the Company or Klein except to the extent that any breach or
Company Liability results in actual costs, expenses, liabilities
or damages to Purchaser or Parent.
SECTION 6.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE
-------------------------------------------------
COMPANY AND PARENT. All the representations and warranties made
------------------
herein by the Purchaser and/or the Parent shall survive the
execution and delivery of this Agreement for a period of two (2)
years following the date of this Agreement; provided, that the
--------
representations and warranties made by the Purchaser and the
Parent in Section 4.2 with respect to due authority shall survive
the execution and delivery of this Agreement.
SECTION 6.4 OBLIGATION OF PURCHASER AND PARENT TO INDEMNIFY.
-----------------------------------------------
The Purchaser and the Parent, jointly and severally, agree to
indemnify, defend and hold harmless the Company (and its
directors, officers, employees, affiliates, successors, assigns
and representatives) and Klein from any and all Losses suffered
or incurred by the Company or Klein or any of the foregoing
persons arising out of (a) any breach of the representations,
warranties, covenants and agreements of the Purchaser or the
Parent contained in this Agreement or in any Transaction
Document, or (b) any liability relating to the use of the
Purchased Assets or the conduct of the Business by Purchaser or
the Parent after the date hereof.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 EXPENSES. Except as otherwise specifically
--------
provided in this Agreement, the parties hereto shall bear their
respective expenses incurred in connection with the preparation,
execution and performance of this Agreement and the Transaction
Documents, including, without limitation, all fees and expenses
of their respective representatives.
SECTION 7.2 PUBLIC ANNOUNCEMENTS. Prior to and after the
--------------------
date of this Agreement, the Company and Purchaser will consult
with each other before issuing any press release or otherwise
making any public statement with respect to the Contemplated
Transactions, and will not issue any such press release or make
any such public statement without the prior approval of the
Company or Purchaser, as the case may be, except as may be
required by applicable Law in which event the other party shall
have the right to review and comment upon (but not approve) any
such press release or public statement prior to its issuance.
SECTION 7.3 FURTHER ASSURANCES. The Company on the one
------------------
hand, and Parent and Purchaser, on the other hand, hereby agree,
without further consideration, to execute and deliver at or
following the date hereof such instruments of transfer and take
such other action as the other parties may reasonably request in
order to put Purchaser in possession of, and to vest in
Purchaser, good, valid and unencumbered title to the Purchased
Assets in accordance with this Agreement and to otherwise give
effect to the Contemplated Transactions. After the date of this
Agreement, Purchaser and Parent shall afford reasonable access to
any and all charter documents and corporate records of the
Company which are in the Purchaser's or Parent's possession as
the Company or Klein may from time to time reasonably request.
SECTION 7.4 DOCUMENTATION. Simultaneously herewith, the
-------------
Company is delivering to Purchaser the following:
(a) A certificate, dated contemporaneously herewith,
of the Secretary or Assistant Secretary of the Company
certifying, among other things, that attached or appended to such
certificate (i) is a true and correct copy of the Certificate of
Incorporation and by-laws (or comparable instruments) of the
Company, and all amendments if any thereto as of the date
thereof; (ii) are the names of the directors and officers of the
Company; (iii) is a true copy of all corporate actions taken by
the board of directors and the shareholders of the Company (which
actions shall have been taken prior to the date of entering into
this Agreement) to authorize the Contemplated Transactions; and
(iv) are the names and signatures of the duly elected or
appointed officers of the Company who are authorized to execute
and deliver this Agreement, the Transaction Documents to which
the Company is a party and any certificate, document or other
instrument in connection herewith.
(b) Possession and control of the Purchased Assets.
(c) Bill of Sale executed by the Company conveying to
Purchaser all of the Purchased Assets being acquired hereunder,
free and clear of any and all Liens, substantially in the form of
Exhibit E hereto.
---------
(d) Good standing certificates for the Company from
the Secretary of State of the State of New York and each of the
jurisdictions in which the Company is qualified to do business as
a foreign corporation.
(e) A signed opinion of the Company's counsel, dated
contemporaneously herewith, addressed to Purchaser and Parent,
substantially in the form of opinion annexed as Exhibit F hereto.
---------
(f) A signed opinion of the Purchaser's and Parent's
counsel, dated contemporaneously herewith, addressed to the
Company and Klein, substantially in the form of opinion annexed
as Exhibit G hereto.
---------
(g) Copies of all Business books and records as
reasonably requested by Purchaser and related to the purchase of
Purchased Assets.
(h) The UCC-3 terminating the European American Bank
lien.
(i) A certificate to be filed by Purchaser on behalf
of the Company with the Department of State of the State of New
York canceling the Company's use and right to the Acquired Name
as a fictitious name of the Company.
(j) A check in the amount of $6,500 for the partial
purchase price of certain shares of the Parent's common stock
being purchased in connection with the Employment Agreement.
SECTION 7.5 NOTICES. (a) Any notice or other communication
-------
required or permitted hereunder shall be in writing and shall be
delivered personally by hand or by recognized overnight courier,
telecopied or mailed (by registered or certified mail, postage
prepaid) as follows:
(i) If to Purchaser or Parent, one copy to:
Paramount Financial Corporation
One Jericho Plaza
Jericho, New York 11753
Telecopier: (516) 938-3995
Attention: Glenn Nortman, Chief Executive
Officer
with a simultaneous copy to:
Thelen Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Telecopier: (212) 603-2001
Attention: Danal F. Abrams, Esq.
(ii) If to the Company, one copy to:
RBW Staffing Resources Inc.
632 Broadway
New York, New York 10012
Telecopier:
Attention: Robert Klein, President
with a simultaneous copy to:
Ruden, McClosky, Smith, Schuster& Russell,
P.A.
200 East Broward Boulevard
P.O. Box 1900
Fort Lauderdale, Florida 33302
Telecopier: (954) 764-4996
Attention: Diane J. Geller, Esq.
(b) Each such notice or other communication shall be
effective (i) if given by telecopier, when such telecopy is
transmitted to the telecopier number specified in Section 7.5(a)
(with confirmation of such transmission), or (ii) when delivered
at the address specified in Section 7.5(a). Any party by notice
given in accordance with this Section 7.5 to the other party may
designate another address or person for receipt of notices
hereunder. Notices by a party may be given by counsel to such
party.
SECTION 7.6 ENTIRE AGREEMENT. This Agreement and the
----------------
collateral agreements executed in connection with the
consummation of the Contemplated Transactions contain the entire
agreement between the parties with respect to the subject matter
hereof and related transactions and supersede all prior
agreements, written or oral, with respect thereto.
SECTION 7.7 WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES;
------------------------------------------------
PRESERVATION OF REMEDIES. This Agreement may be amended,
------------------------
superseded, canceled, renewed or extended only by a written
instrument signed by the parties hereto. The provisions hereof
may be waived only in writing by the parties hereto. No delay on
the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver
on the part of any party of any such right, power or privilege,
nor any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise
of any other such right, power or privilege. Except as otherwise
provided herein, the rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that
any party may otherwise have at law or in equity.
SECTION 7.8 GOVERNING LAW. This Agreement shall be governed
-------------
and construed in accordance with the laws of the State of New
York applicable to agreements made and to be performed entirely
within such State, without regard to the conflict of laws rules
thereof.
SECTION 7.9 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
----------------------------------------------
The parties hereto irrevocably: (a) agree that any suit, action
or other legal proceeding arising out of this Agreement may be
brought in the courts of the State of New York or the courts of
the United States located in the State of New York, (b) consent
to the jurisdiction of each court in any such suit, action or
proceeding, (c) waive any objection which they, or any of them,
may have to the laying of venue of any such suit, action or
proceeding in any of such courts, and (d) waive the right to a
trial by jury in any such suit, action or other legal proceeding.
SECTION 7.10 FEES OF PREVAILING PARTY. If there is a dispute
------------------------
under this Agreement or the Transaction Documents, the prevailing
party shall be entitled to recover from the losing party all
reasonable attorneys' fees and costs incurred by it in the
resolution of such dispute.
SECTION 7.11 BINDING EFFECT; NO ASSIGNMENT. This Agreement
----------------------------
and all of its provisions, rights and obligations shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors, heirs and legal representatives.
This Agreement may not be assigned (including by operation of
Law) by a party without the express written consent of Purchaser
and Parent (in the case of assignment by the Company or Klein) or
the Company (in the case of assignment by Purchaser or Parent)
and any purported assignment, unless so consented to, shall be
void and without effect; provided, that the benefits hereunder
--------
(but not the obligations) of Purchaser or Parent may be assigned
by Purchaser or Parent and the benefits hereunder (but not the
obligations) of Company may be assigned by the Company. Nothing
herein express or implied is intended or shall be construed to
confer upon or to give anyone other than the parties hereto and
their respective heirs, legal representatives and successors
any rights or benefits under or by reason of this Agreement and
no other party shall have any right to enforce any of the provisions
of this Agreement.
SECTION 7.12 EXHIBITS. All Exhibits attached hereto are
--------
hereby incorporated by reference into, and made a part of, this
Agreement.
SECTION 7.13 SEVERABILITY. If any provision of this
------------
Agreement for any reason shall be held to be illegal, invalid or
unenforceable, such illegality, invalidity or unenforceability
shall not affect any other provision of this Agreement, but this
Agreement shall be construed as if such illegal, invalid or
unenforceable provision had never been included herein.
<PAGE>
SECTION 7.14 COUNTERPARTS. The Agreement may be executed in
------------
any number of counterparts, each of which shall be deemed to be
an original as against any party whose signature appears thereon,
and all of which shall together constitute one and the same
instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear
the signatures of all of the parties reflected hereon as the
signatories.
IN WITNESS WHEREOF, the undersigned have executed this
------------------
Agreement as of the date set forth above.
RBW STAFFING RESOURCES INC.
By: /s/ Robert Klein
--------------------------
Name: Robert Klein
Title: President
/s/ Robert Klein
------------------------------
Robert Klein
PARAMOUNT FINANCIAL CORPORATION
By: /s/ Glenn Nortman
---------------------------
Name: Glenn Nortman
Title: Chief Executive Officer
DELTAFORCE PERSONNEL SERVICES
By: /s/ Jeffrey Nortman
----------------------------
Name: Jeffrey Nortman
Title: Chief Executive Officer
EXHIBIT 21
----------
LIST OF SUBSIDIARIES OF PARAMOUNT FINANCIAL CORPORATION
. Paratech Resources, Inc. (owned by Paramount);
incorporated in New York
. Deltaforce Personnel Services, Inc. (owned by
Paramount); incorporated in New York
. Abbey, Garrett & Seth, Ltd. (owned by Paratech);
incorporated in New York; does business under the name
Comptech Resources
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<PERIOD-END> DEC-31-1998
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<COMMON> 86
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